<PAGE>   1


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                     OF 1934
                                 [FEE REQUIRED]

                   For the fiscal year ended December 31, 1998
                                       OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                         Commission file number 0-18599

                             BLACKHAWK BANCORP, INC.
          WISCONSIN                                            39-1659424 
   (State of Incorporation)                              (IRS Employer ID No.)

                   400 Broad Street, Beloit, Wisconsin 53511
                        Telephone Number (608) 364-8911

          Securities Registered Pursuant to Section 12(b) of the Act:
                                      NONE

          Securities Registered Pursuant to Section 12(g) of the Act:
                         COMMON STOCK, $ .01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. Yes  X  No    .
                                      ---   ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
                              -----

          Revenue for the year ended December 31, 1998 was $19,825,000

As of March 23, 1999, 2,315,317 shares of common stock were outstanding and the
aggregate market value (based on the bid price at March 23, 1999) of the shares
held by non-affiliates (excludes shares reported or beneficially owned by
directors and officers - does not constitute an admission to affiliate status)
was approximately $21,151,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference in the
respective parts hereof indicated: 
     1. Proxy Statement and Annual Meeting of stockholders, on May 19, 1999, 
     dated April 3, 1999.

                      Index of Exhibits on Page .Page 1 of


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                             BLACKHAWK BANCORP, INC.

                         FORM 10-KSB - TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                   PART I PAGE
<S>       <C>                                                                          <C>
Item  1   Business.................................................................      3


Item  2   Properties...............................................................     10

Item  3   Legal Proceedings........................................................     11

Item  4   Submission of Matters To a Vote of
            Security Holders.......................................................     11

PART II

Item  5   Market for the Registrant's Common Stock and
            Related Stockholder Matters............................................     11

Item  6   Management's Discussion and Analysis of
            Financial Condition and Results of
            Operations.............................................................     11

Item  7   Financial Statements and Supplemental Data...............................     18

Item  8   Changes in and Disagreements with
            Accountants on Accounting and Financial
            Disclosure.............................................................     60

PART III

Item  9   Directors and Executive Officers of the
            Registrant.............................................................     60

Item 10   Executive Compensation...................................................     60

Item 11   Security Ownership Of Certain Beneficial
            Owners and Management..................................................     60

Item 12   Certain Relationships and Related
            Transactions...........................................................     60

PART IV

Item 13    Exhibits, Financial Statement Schedules, and
             Reports on Form 8-K...................................................     60

Signatures.........................................................................     61
</TABLE>


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                                     PART I

ITEM 1 BUSINESS

GENERAL. Blackhawk Bancorp, Inc., (the "Company"), was incorporated under the
laws of the state of Wisconsin in November 1989. The Company owns and operates a
subsidiary financial institution, Blackhawk State Bank ("Bank"), located in
Beloit, Wisconsin.

Bank is a Wisconsin-chartered commercial bank operating five branches in the
Greater Beloit Area, three free-standing branches and two in-store branches. Six
additional free-standing branches are in the following cities: Belvidere (2),
Oregon (1), Rochelle (1), Rockford (1) and Roscoe (1). The Bank has three wholly
owned subsidiaries. Nevahawk Investment, Inc. ("Nevahawk") is an investment
subsidiary located in Las Vegas, Nevada. RSL, Inc., a second subsidiary whose
activities include the sale of mutual funds and annuities, and in turn owns
Midland Acceptance Corporation ("MAC"), a consumer finance company that has
offices in Rochelle and Rockford, Illinois. First Financial Services, Inc.
("FFSI"), the third subsidiary, sells, on an agency basis, mortgage-related
insurance products and a variety annuity products.

On April 30, 1997, the Company completed the purchase of all of the outstanding
shares of Rochelle Bancorp, Inc. ("Rochelle") of Rochelle, Illinois, for
approximately $4.2 million in cash. Rochelle's wholly owned subsidiary, Rochelle
Savings Bank S.B., was an Illinois state chartered savings bank with offices in
Rochelle and Oregon, Illinois, and assets totaling approximately $51.0 million.
This acquisition was accounted for as a purchase transaction. On March 31, 1998,
the charter of Rochelle Savings Bank S.B. merged into the charter of 
Blackhawk State Bank.

As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
assets of approximately $2.5 million.

Effective September 1, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, and assets totaling approximately
$86.0 million was merged into the Bank, on the effective date of purchase.

The principal sources of funds for the Bank's lending activities are deposit
accounts, amortization and prepayment of loans, short-term borrowings, and funds
provided from operations. The principal sources of income are interest and fees
on loans, interest on investments and non-interest income, consisting of fees
for servicing loans, service charges, trust department fees and income from
retail non-deposit investment sales.

LENDING ACTIVITIES. A majority of the loans in the Bank's loan portfolio are
secured by residential or commercial real estate. Substantially all of the real
estate securing the mortgage loans is located within thirty minutes of the
Bank's offices. Previously, Management of the Company has restructured the loan
portfolio of the Greater Beloit Area Bank to decrease the concentration of
mortgage loans and increase commercial and installment loans. Management of the
Company anticipates the restructuring of the loan portfolio of the acquired
institutions. The Analysis of Loan Portfolio, Table 2 of Item 7, shows the
changes in the types of loans from 1996 through 1998.

Commercial loans are either collateralized by assets other than real estate or
are unsecured. Interest rates on commercial loans are generally tied to an index
adjustable monthly and therefore more rate sensitive than mortgage loans.
Consumer and installment loans are generally secured by automobiles, boats, or
junior liens on real estate. A substantial percentage of automobile and boat
loans in the portfolio were purchased from area dealers. The Bank also offers
credit cards and home equity lines of credit.

Approximately $130 million in single one-to-four family loans are serviced for
others. These were acquired through the purchase transactions mentioned above.
Substantially all of these loans are 100% sold to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). MAC is a sub-prime lender, and has approximately
$2.0 million in outstanding loans.


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<PAGE>   4


INVESTMENT ACTIVITIES. The investment policy under which the Company and its
subsidiary operates normally limits investments to: 1) U.S. Treasury and
government agency securities with maturities of 5 years or less; 2)
mortgage-backed securities, limited to no more than 30% of the investment
portfolio, with an average life of 5 1/2 years or less; 3) municipal securities
rated "A" or better, unless they are tax-anticipation notes issued by Wisconsin
issuers whose long-term debt is rated at least "A" or if unrated, are judged by
management to possess investment characteristics comparable to "A" rated debt
securities; and 4) corporate bonds and notes rated "A" or better with a maturity
of 4 years or less.

Security investments made to a single entity are limited to 20% of its capital
and surplus. This limitation does not apply to investments in obligations of the
United States Treasury, Federal Land Banks, Federal Home Loan Banks, Federal
Farm Credit Banks, Federal National Mortgage Association, Export-Import Bank of
Washington or obligations fully and unconditionally guaranteed by the United
States. It is the Company's and its subsidiary's intention to hold securities
until maturity and are classified as such for IRS purposes. Generally, the
recently purchased securities held by the Company, the Bank and Nevahawk are
classified as available-for-sale.

Of the Bank's portfolio, approximately $9.0 million is managed at its main
office. Another $18 million is managed by the Belvidere office. The Bank may
purchase the same types of securities under the same general restrictions as are
noted above. In addition, commercial paper, bankers acceptances and bank
certificates of deposit are authorized investments to provide additional
liquidity in the investment portfolio.

During 1991, Beloit transferred approximately $21.5 million worth of its
investment securities to Nevahawk, it's wholly-owned subsidiary located in Las
Vegas, Nevada. Currently, the portfolio under management by Nevahawk is
approximately $25.0 million. The transfer of an additional $7 million is
anticipated in March 1999.

The Company can maintain an investment portfolio that consists of securities
similar to those mentioned above. At December 31, 1998, securities held by the
Company were minimal.

DEPOSIT ACTIVITIES. Deposits are divided between interest bearing and
non-interest bearing. Non-interest bearing deposits consist of checking accounts
of individuals and non-personal entities. The interest-bearing deposits include
savings accounts, money market deposit accounts, certificates of deposit,
individual retirement accounts, NOW accounts and check club accounts. The Bank
has few depositors with account balances in excess of $100,000. During 1997
Beloit acquired approximately $1.0 million in brokered deposits which mature
July 1999. The Bank attracts deposits by offering competitive interest rates for
interest-bearing accounts and services on a competitive basis for non-interest
bearing accounts.

TRUST SERVICES. Through a separate department the Bank provides personal trust
services, including acting as trustee for living and testamentary trusts, and as
an agent, custodian, guardian, conservator, personal representative or
administrator for individuals or their estates. Trust offices are maintained at
the Bank's main location in Beloit, Wisconsin.

OTHER SERVICES. The Bank provides a wide range of other banking services for
both retail and commercial customers. It also provides full-service brokerage
services through Raymond James Securities, Inc. in three locations.

COMPETITION. Banks experience intense competition in both attracting and
retaining deposits and in making loans. The Bank's direct competition for
deposits has come from other commercial banks, savings and loan associations,
credit unions, mutual funds and stock brokerage firms. In addition to offering
competitive types of accounts and interest rates, the principal methods used by
the Bank to attract deposits included the offering of a variety of services,
convenient business hours, and branch locations.

Competition in making real estate loans comes principally from savings and loan
associations, mortgage companies and other commercial banks. Consumer loans
provided by credit unions, finance companies and other commercial banks provide
the competition in this area.
Other commercial banks are the major competition for commercial loans.

EMPLOYMENT. As of December 31, 1998, the Company and the Bank had 164 employees,
of which 114 were employed on a full time basis. The fringe benefits generally
provided to qualified employees include health insurance,


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long-term disability insurance, a flexible compensation plan (cafeteria plan), a
401k deferred compensation and profit-sharing plan. Management considers its
relations with employees to be excellent.

SUPERVISION AND REGULATION. The Company and the Bank are extensively regulated
under federal and state law. Any descriptions of statutory and regulatory
provisions contained in the following discussion are qualified in their entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable law or regulations may have a material effect on the Company.

THE COMPANY. On March 27, 1990, the Company received approval from the Federal
Reserve Board (the "FRB") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), to become a registered bank holding company by acquiring all of
the capital stock of the Bank. As a result, since consummation of the Conversion
on May 16, 1990, the Company's activities have been subject to limitations
imposed under the BHC Act. Transactions between the Company and the Bank and
their affiliates are also subject to certain restrictions. As a registered bank
holding company, the Company is subject to various filing requirements of the
FRB and is also subject to examination by the FRB.

FRB approval must be obtained before a bank holding company acquires all or
substantially all of the assets of a bank or savings association or merges or
consolidates with another bank holding company or savings and loan holding
company. Wisconsin has also adopted legislation which allows bank holding
companies from states that have adopted reciprocal legislation (the "Reciprocal
States") to acquire banks in Wisconsin, and allows Wisconsin bank holding
companies to acquire banks in the Reciprocal States. The Reciprocal States
presently include Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, and
Ohio.

Under the BHC Act, bank holding companies are prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company. A bank holding company may, however, own shares of a company, the
activities of which the FRB has determined to be so closely related to banking,
managing or controlling banks as to be a proper incident thereto; the holding
company itself also can engage in such activities. With the acquisition of
Rochelle, the Company also acquired the outstanding stock of Midland, which is a
finance company, and as such is an activity closely related to banking
activities. The Company does not have any other current plans to seek approval
to acquire any of these bank related activities. However, it may determine to do
so in the future. Much conflict has arisen in this area of the law and
regulations. In some instances regulators are authorizing activities allowed
under the law and stated above.

The FRB has adopted capital guidelines as to both minimum levels of core capital
and risk-based capital. The minimum core capital requirement ranges from 3% to
5% of total assets depending upon the regulator's determination of the holding
company's strength. The guidelines assign risk weightings to assets and
off-balance sheet items, and have minimum risk-based capital ratios. All bank
holding companies are required to have total consolidated capital of 8% of
risk-weighted assets. Core capital consists principally of shareholders' equity
less intangibles, while qualifying total capital consists of core capital,
certain debt instruments and a portion of the reserve for loan losses. Table 12,
filed elsewhere in this report, reflects various regulatory measures of capital
as of December 31, 1998. The Company's core and risk-based capital ratios, as
shown in the table are well above the minimum levels.


Under Wisconsin law, a bank holding company is deemed to be engaged in the
banking business and is subject to supervision and examination by the Wisconsin
Department of Financial Institutions (the "Commissioner"). The Commissioner is
also empowered to issue orders to a bank holding company to remedy any condition
or policy which, in the opinion of the Commissioner, endangers the safety of
deposits of any subsidiary state bank or trust company. In the event of
non-compliance with such an order, the Commissioner has the power to direct the
operations of the state bank or trust company and to restrict dividends paid to
the bank holding company.

THE BANK. Wisconsin-chartered banks, including the Bank, are regulated and
supervised by the Wisconsin Department of Financial Institutions. Each
Wisconsin-chartered bank is required to be examined at least once each year by
either the Commissioner or its primary federal regulator. The approval of the
Commissioner is required to establish or close branches, merge with other banks
and undertake many other activities.



                                       5
<PAGE>   6

Any Wisconsin bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner may be subject to sanctions for
noncompliance. The Commissioner may, under certain circumstances, suspend or
remove directors, officers or employees who have violated the law, conducted the
bank's business in a manner which is unsafe, unsound or contrary to the
depositors' interests or been negligent in the performance of their duties.

Wisconsin state banks are authorized to accept deposits (including demand,
savings and time deposits and certificates of deposit). Banks may make a wide
variety of loans (including mortgage loans, loans to corporations and other
commercial loans and other personal consumer loans). Other federal and state
regulations with respect to banks include required reserves, limitations as to
the nature and amount, by type and borrower, of lending, regulatory approval of
mergers and consolidations, issuance and retirement by a bank of its own
securities, and other aspects of banking operations.

Under Wisconsin law, the Commissioner has the authority, by rule or order, to
grant Wisconsin state banks the power to conduct any financial service which is
being offered by any other financial-related institution; under those
provisions, the Commissioner has approved banks engaging in general insurance
agency services and securities brokerage services. Each of the above services is
not a permitted activity of bank holding companies or bank holding company
subsidiaries. The FRB has generally not asserted jurisdiction over the powers of
state-chartered bank subsidiaries of bank holding companies.

PAYMENT OF DIVIDENDS. A Wisconsin bank may only pay dividends on its capital
stock if such payment would not impair the bank's capital stock and surplus
account (as defined under Wisconsin law). If, on the date of declaration of a
dividend on common stock, the ratio of capital stock and surplus to total
deposits is less than 10%, there must be a transfer from net profits to the
surplus account before the dividend may be paid. Based on the Bank's strong
financial position, its entire earnings each year could be paid out as
dividends.

Nevahawk can pay dividends to the Bank from retained earnings without any tax
consequences. There are no plans, at the present, for Nevahawk to pay dividends
in 1999. This status will be reviewed by Nevahawk at its regular board meetings.

FEDERAL DEPOSIT INSURANCE CORPORATION. The Bank's deposit accounts are insured
by the FDIC. FDIC insurance, at the present time, generally insures up to a
maximum of $100,000 per insured depositor. The FDIC imposes an annual assessment
on deposits. Effective January 1, 1993, premiums are assessed on the basis of a
risk rating assigned by the FDIC. Since that time the Bank's premium has been at
the lowest available rate. Beginning in 1997, financial institutions insured by
the FDIC are required to contribute to the FICO bond refinancing. This is
expected to occur through the year 2003. The deposits acquired with the
purchases of Rochelle and Belvidere will continue to be assessed at the higher
thrift rate.

The FDIC issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to any merger or consolidation, or the
establishment or relocation of any branch office. This supervision and
regulation is intended primarily for the protection of depositors.

As an FDIC-insured bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FDIC, based upon appraisals during examinations, may revalue
assets of an insured institution and require establishment of specific reserves
in amounts equal to the difference between such revaluation and the book value
of the assets. In addition, the FDIC has adopted regulations regarding capital
adequacy requirements similar to those of the FRB.

OTHER ASPECTS OF FEDERAL AND STATE LAW. The Bank is also subject to federal and
state statutory and regulatory provisions covering, among other things, security
procedures, currency reporting, insider and affiliated party 


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<PAGE>   7

transactions, management interlocks, community reinvestment,            
truth-in-lending, electronic funds transfers, truth-in-savings and equal credit
opportunity.

Proposals for new legislation or rule making affecting the financial services
industry are continuously being advanced and considered at both the national and
state levels. Proposals are primarily focused upon restructuring and
strengthening regulation and supervision to reduce the risks to which assets of
banks and savings institutions are exposed.

Although further changes in the regulatory framework may be enacted, specific
provisions and their ultimate effect upon the business of the Bank and the
Company cannot be reliably

GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS. The earnings of the Bank
and the Company are affected not only by general economic conditions but also by
the policies of various governmental regulatory authorities. In particular, the
FRB influences general economic conditions and interest rates through the
regulation of money and credit conditions. It does so primarily through
open-market operations in U.S. Government Securities, varying the discount rate
on member and nonmember bank borrowings, and setting reserve requirements
against bank deposits. FRB monetary policies have had a significant effect on
the operating results of banks in the past and are likely to continue to do so
in the future. The general effect, if any, of such policies upon the future
business and earnings of the Bank cannot be accurately predicted. In addition,
losses sustained by the federal insurance funds and regulatory costs incurred in
connection with failed or failing insured depository institutions continue to be
assessed to those within the industry. As such, future earnings will be
adversely affected by regulations enacted to cover these losses and costs. Past
increases in FDIC insurance premiums are an example of this.

EXECUTIVE OFFICERS

      NAME AND AGE                        PRINCIPAL OCCUPATION 

      Dennis M. Conerton, 48    President and Chief Executive
                                Officer of the Company and of the
                                Bank.  Prior thereto, Vice
                                President-Controller,
                                Regal-Beloit Corporation.

      James P. Kelley,  55      Executive Vice President and
                                Secretary of the Company
                                and Executive Vice President of
                                the Bank and the Bank's
                                predecessor, Beloit Savings Bank.





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<PAGE>   8


      Jesse L. Calkins, 58      Senior Vice President, Treasurer and
                                Chief Financial Officer of the Company
                                and Senior Vice President of the Bank,
                                and the Bank's predecessor, Beloit
                                Savings Bank.

      Richard J. Rusch, 54      Vice President Commercial Lending of the
                                Bank since August 1990.  Prior thereto,
                                Vice President Commercial Loans, M & I
                                Bank of Beloit.

      David A. Stearns, 52      Senior Vice President of the Bank
                                (October 1998 to Present); President
                                and Chief Executive Officer of the
                                Castle Bank Harvard, N.A., Harvard, IL
                                (1995 - 1997); President and Chief
                                Executive Officer of the Harris Bank
                                Woodstock, Woodstock, IL (1992 - 1995).

ITEM 2.  PROPERTIES

On December 31, 1998, the Company had eleven locations, of which three were
leased. All of these offices are considered by management to be well maintained
and adequate for the purpose intended. See the Notes to Consolidated Financial
Statements included under Item 7 of this document for further information on
properties.

ITEM 3.  LEGAL PROCEEDINGS

To management's knowledge no material legal proceedings are contemplated or
pending to which it or its affiliates are or threatened to be a party, of which
any of their property would be subject, other than routine litigation incidental
to its business.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1998.


                                     PART II

ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE STOCKHOLDERS MATTERS

As of March 20, 1998 there were 403 Registered Stockholders. Information in
response to this item is found on page of this report. A table listing the
declaration of dividends is found on page .

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

Management's Discussion and Analysis of Financial Condition and Result's of
Operation

The following discussion provides additional analysis of the Company's financial
statements presented in its annual report and should be read in conjunction with
this information. This discussion focuses on the significant factors which
affected the Company's earnings in 1998, with comparisons to 1997 and 1996 where
applicable. As of December 31, 1998, Blackhawk State Bank (the "Bank") was the
only direct subsidiary of the Company and its operations contribute nearly all
of the revenue and expenses for the year. The Bank has three wholly owned
subsidiaries. Nevahawk Investment, Inc. ("Nevahawk") is an investment subsidiary
located in Nevada. RSL, Inc., which operates mutual fund and annuity activities,
and in turn owns Midland Acceptance Corp. ("MAC"), a consumer finance company
that has offices in Rochelle and Rockford, IL. First Financial Services of
Belvidere, Inc. ("FFSI") administers and sells, on an agency basis,
mortgage-related insurance products and sells on an agency basis a variety of
annuity products.

Overview


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<PAGE>   9
On April 30, 1997, the Company completed the purchase of all of the outstanding
shares of Rochelle Bancorp, Inc. ("Rochelle") of Rochelle, Illinois, for
approximately $4.2 million in cash. Rochelle's wholly owned subsidiary, Rochelle
Savings Bank S.B., was an Illinois state chartered savings bank with offices in
Rochelle and Oregon, Illinois, and assets totaling approximately $51.0 million.
This acquisition was accounted for as a purchase transaction. On March 31, 1998,
the charter of Rochelle Savings Bank S.B.
merged into the charter of Blackhawk State Bank.

As a part of this purchase, the Company also acquired all of the outstanding
shares of Midland Acceptance Corporation ("MAC"), a financing subsidiary with
assets of approximately $2.5 million.

Effective September 1, 1998, the Company completed the purchase of all of the
outstanding shares of First Financial Bancorp, Inc. ("Belvidere") of Belvidere,
Illinois for approximately $12.7 million in cash. Belvidere's wholly owned
subsidiary, First Federal Savings Bank, a federal savings bank with two offices
in Belvidere and one in Rockford, Illinois, and assets totaling approximately
$86.0 million was merged into the Bank, on the effective date of the purchase.

Results of operations of Rochelle and Belvidere are incorporated in the
Company's statements from the respective acquisition dates forward.

Net interest income
Net interest income ("Interest Margin") is the difference between interest
income and fees on loans and interest expense, and is the largest contributing
factor to net income for the Company. All discussions of income amounts and
rates are on a tax-equivalent basis, which accounts for income earned on loans
and securities, which are not fully subject to income taxes as if they were
fully subject to income taxes. Interest Margin in 1998 was $8.9 million,
increasing 16.5% over the 1997 level of $7.7 million, which was 26.2% higher
than the 1996 level of $6.0 million. Interest margin as a percent of average
earning assets ("Interest margin rate") was 4.24% in 1998, 4.52% in 1997 and
4.33% in 1996. The decrease between 1998 and 1997 is the result of the addition
of the Belvidere operations, which had a lower interest margin rate than the
Company and the downward trend in overall interest rates during the later part
of 1998.

Interest income and fees on loans is the largest component of interest income
and was the largest factor in the 21.4% increase in interest income during 1998.
Each loan category had an increase in average balances as compared to 1997, the
result of the acquisition of Belvidere. The yield earned on loans decreased to
9.10% in 1998 compared to 9.25% in 1997. Loan yields have been adversely
affected by the decrease in overall market rates and the addition of Belvidere
loans, which are predominately one-to-four family mortgage loans earning lower
yields.

Interest income and fees on loans increased 32.1% and was the largest factor in
the increase of interest margin in 1997 compared to 1996. The interest income in
each of the major loan categories increased in 1997 compared to 1996 primarily
due to the Company's acquisition of Rochelle. Increased rates also contributed
to a lesser extent to an increase in consumer loan interest. Total loan volumes
increased 38.5% for this same period.

Investment income increased 12.8%, to $2.9 million in 1998 compared to $2.6 in
1997. Average balances for both types of investment securities were higher in
1998 when compared to 1997. The Company reinvested maturities from taxable
securities to tax-exempt securities to take advantage of the favorable spread
between these two investment types. The average balances of taxable investment
securities were also affected by the Belvidere acquisition. The yield on taxable
investment securities fell to 6.31% in 1998 from 6.52% in 1997, mostly due to
lower overall market rates.

Investment income increased 4.1%, to $2.6 million in 1997 compared to $2.5
million in 1996. The increase during this period was primarily the result of
increased rates on taxable securities, which offset the reduced income from
tax-exempt securities. Income from tax-exempt securities declined due to lower
volume. The average balance of total investments decreased by 3.0% in 1997
compared to 1996, as the Company liquidated investment securities to purchase
Rochelle. The decline in volume of tax exempt securities was only partially
offset by the increase in volume of taxable securities.

Total interest expense was $8.5 million in 1998, increasing 27.0% from $6.7
million in 1997. Increased volumes are the primary factors for this increase.
These increased volumes are attributable to growth of the Bank's deposit base,
the acquisition of deposits from Belvidere and the use of borrowings to complete
the Belvidere transaction. This increase due to volumes was partially offset by
lower rates paid on deposits. The average rate paid on deposits decreased to
4.63% in 1998 compared to 4.70% in 1997.

Interest expense totaled $6.7 million in 1997 compared to $5.4 million in 1996,
representing an increase of 24.7%. The increased interest cost was primarily the
result of higher deposit volume acquired with the purchase of Rochelle. The
average rate of interest on deposits remained relatively static at 4.70% and
4.71% in 1997 and 1996, respectively. The variance in interest expense between
1997 and 1996 in other borrowings was primarily the result of reduced volume.
However, the average cost of borrowings also declined in 1997 to 4.77% compared
to 4.80% in 1996.

Other Operating Income and Expenses
Other operating income increased 62.7% to $2.5 million in 1998 from $1.5 million
in 1997. Gain on sale of loans and mortgage loan servicing income were the most
significant factors in the increase. With the acquisition of Rochelle and
Belvidere, the Company acquired approximately $130.0 million of mortgages
serviced for others. As part of the servicing arrangement, the Company retains a
portion of the interest collected as a
                                       9
<PAGE>   10
servicing fee. The other major categories of other operating income also
increased significantly when comparing 1998 to 1997. Trust fees increased 19.6%
and service charges and fees increased 22.2% between periods. The increase in
trust fees was the result of a larger volume of assets under management and a
higher market value of assets under management. The increase in service charges
and fees was largely attributable to the Belvidere acquisition.

Other operating income increased 52.7% to $1.5 million in 1997 from $1.0 million
in 1996. Service charges and fees represented more than half of the total in
each year. They also represented $330,000 of the $530,000 increase in other
operating income. Most of the increase in service charges resulted from the
inclusion of the Rochelle operations. Loan servicing fees accounted for $95,000
of additional income in 1997. Trust fees and investment center commissions
experienced significant percentage gains in 1997 compared to 1996. Other
operating expenses increased 31.3% to $7.8 million in 1998 from $5.9 million in
1997. Inclusions of Rochelle for a full year and Belvidere for four months in
1998 along with the amortization of purchased intangibles were the biggest
factors in the increase. Also contributing to the increase was the fact that the
Bank opened an in-store facility in July 1997 and a stand-alone branch in the
Northern Illinois market in March 1998. Some areas of expense such as data
processing and professional fees did not increase as much as overall expenses.
This was the result of efficiencies gained as a result of merging charters and
merging of the data processing system of Rochelle's into Beloit's.

Operating expense increased 40.5% to $5.9 million in 1997 compared to 1996. The
most substantial portion of this increase was the result of the Rochelle
purchase. In addition, the opening of a second in-store facility in a newly
constructed Wal-Mart SuperCenter contributed to some of the increase. Other
operating expense increased $185,000 or 4.6% in 1997 compared to 1996. Increases
in salaries, employee benefits, data processing and other expenses were
partially offset by decreases in equipment costs, FDIC insurance premiums,
professional fees and advertising expenses.

Management monitors three ratios related to other operating income and expense:
(1) Net other operating expense as a percentage of average assets, (2) standard
efficiency ratio and (3) gross efficiency ratio. Net other operating expense to
average assets improved to 2.29% in 1998 from 2.39% in 1997 but did not attain
the 1996 level of 2.16%. Considering all assets under management (mortgage loans
serviced for others and managed trust assets) this ratio decreased for the third
consecutive year, and was 1.56% in 1998, compared to 1.79% in 1997 and 1.96% in
1996. The standard efficiency ratio (other operating expense divided by net
interest income plus other operating income) increased to 68.8% in 1998,
compared to 64.8% in 1997 and 60.8% in 1996. Adjusted for intangible
amortization, the ratio increased to 65.6% in 1998 compared to 63.3% in 1997 and
60.8% in 1996. The gross efficiency ratio (other operating expense divided by
interest income plus other operating income) increased to 39.1% in 1998 compared
to 37.3% in 1997 and 34.2% in 1996. Adjusted for intangible amortization the
ratio increased to 37.2% in 1998, compared to 36.4% in 1997 and 34.2% in 1996.

The downward trend in the efficiency ratios was expected, and is attributable to
the newly acquired operations that are not fully integrated into the Company and
to the additional branch office locations. These operations should begin to have
a positive impact on the efficiency ratios as they continue to increase their
customer base. The efficiency ratios were also negatively impacted because of
lower market interest rates and Belvidere's lower relative margin as compared to
the Company's overall margin.

Provisions For Losses
The provision for loan losses was $315,000, $192,000 and $145,000 for 1998,
1997, and 1996, respectively. In 1998, the Bank had net charge-offs of $374,000,
(total charge-offs of $395,000 less recoveries of $21,000), compared to 1997
when it had net charge-offs of $176,000, (total charge-offs of $215,000 less
recoveries of $39,000). In 1996, Beloit experienced net recoveries of $112,000.
The net recovery in 1996 resulted from recoveries of $221,000 off-setting
charge-offs of $109,000. Most of the recovery was from a loan that was
originally charged off in 1994. Excluding the large recovery, net charge-offs to
average loans would have been .07% in 1996. Net charge-offs to average loans was
 .24% in 1998 and .14% in 1997.

The allowance for loan losses as a percent of loans was 1.08% at December 31,
1998 compared to 1.11% at December 31, 1997 and to 1.19% at December 31, 1996.
This downward trend is attributable to a shift in the Company's loan mix. With
the acquisition of Rochelle and Belvidere, the Company has a higher proportion
of one to four family mortgages, which generally are lower risk loans.
Management feels that the allowance for loan loss provision is adequate based
upon the current portfolio and market conditions. As the loan portfolio shifts
and market conditions warrant, the provision may be adjusted.

Income Taxes
The effective income tax rate increased to 37.2% in 1998 from 35.3% in 1997 and
32.9% in 1996. The most significant reason for the increase in 1998 and 1997 is
that the amortization of intangible assets, resulting from the acquisitions, is
not deductible for tax purposes. In addition, the Company has invested less in
municipal securities exempt from Federal taxes during 1997, as yields on taxable
securities have become more favorable. During 1998, yields on tax-exempt
securities were more favorable and therefore the Company reinvested maturing
bonds into tax-exempt securities to take advantage of this difference. Because
Nevahawk is located in Nevada, its income is not subject to state income tax.
Therefore, as a higher proportion of income is earned outside of Nevada, the
effective rate increases. The income generated in Illinois was subject to
Illinois income tax as well as federal income tax. The Illinois and Wisconsin
effective tax rates are approximately the same.

Balance Sheet Analysis

                                       10
<PAGE>   11

Total assets as of December 31, 1998 were $291.5 million increasing 44.3% from
$202.0 million as of December 31, 1997. Total average assets were $229.9 million
for the year ended December 31, 1998 compared to $183.1 million for the year
ended December 31, 1997, representing an increase of 25.6%. Most of the increase
was the result of the Belvidere acquisition.

Cash and Cash Equivalents
Most of the increase in cash and cash equivalents was the result of the
Belvidere acquisition. Also contributing to the increase was the addition of a
new branch in March 1998, and increased cash items in collection (cash letters).
As a percent of average assets, cash and cash equivalents have remained
relatively static.

Federal Funds Sold And Other Short-term Investments
The increase in federal funds sold and other short-term investments ("fed
funds") is mostly attributable to Belvidere. Belvidere is holding additional fed
funds in anticipation of possible deposit runoff from a certificate of deposit
special scheduled to mature during the first quarter of 1999. Depending on the
runoff amount, the remainder of fed funds will be invested into longer-term
securities. As a percent of average assets, fed funds increased to 3.0% during
1998 as compared to 1.5% in 1997.

Securities
The increase in securities is mostly attributable to the Belvidere acquisition.
Without the acquisition, security balances would have declined in 1998 as
compared 1997. As a percent of average assets, securities decreased to 19.7% in
1998 compared to 21.4% in 1997. It is expected that the average balance of
securities will increase in 1999. As previously discussed, the Company shifted
maturing investments from taxable securities to tax-exempt securities. Given the
current rate environment, this shift is expected to continue.

Loans
Again, the increase in loan balances is the result of the Belvidere acquisition.
Without the acquisition, loan balances would have decreased when comparing 1998
to 1997. This was the result of a very competitive environment in all loan
categories. Many real estate customers took advantage of low fixed-rate
mortgages and refinanced their adjustable-rate mortgages. The Bank has
traditionally kept adjustable-rate mortgages in its portfolio while selling
fixed rate mortgages to the secondary market. The installment loan market is
also very competitive, with consumers having many financing options available to
them. Average loans decreased slightly as a percent of average assets to 66.8%
in 1998 compared to 67.7% in 1997. It is expected that average loan balances as
a percent of average assets will increase during 1999.

Non-Performing Loans
Non-performing loans as a percent of total loans increased to 1.45% as of
December 31, 1998 from .77% as of December 31, 1997. Most of this increase is
the result of higher impaired loans. Impaired loans are those loans that are not
necessarily past due or non-accruing, but collection of interest is not assured.
The average balance of impaired loans also increased $634,000 in 1998 compared
to $405,000 in 1997. It is the Company's policy to place a loan on non-accrual
once it has become 90 days delinquent or if it is determined that collection is
questionable. As the level of consumer and commercial loans increase, wider
fluctuations for non-performing loans may occur.

Deposits
Total deposits increased to $241.4 million in 1998 from $159.1 million in 1997,
mostly the result of the Belvidere acquisition. Without the acquisition, average
deposits would have increased 4.4%. Average deposits increased to $163.5 million
in 1998 from $126.3 million in 1997. The biggest increase in average balances
was in savings accounts, which include money market account funds. The mix of
deposits as a percent of average assets experienced very little shift comparing
1998 to 1997. During 1999, the mix of deposits is expected to be weighted more
towards time deposits. The Company is planning to shift this mix closer to that
of a traditional commercial bank, which would be away from higher interest time
deposits.

Total non-interest bearing demand accounts increased due more to growth in
existing accounts and less because of the Belvidere acquisition. As a percentage
of average assets, non-interest bearing demand accounts were 9.5% in 1998 versus
9.0% in 1997. The Company plans to increase business relationships in the
Rochelle and Belvidere markets, which over time should increase the balance in
these accounts. Traditionally, neither Rochelle nor Belvidere sought commercial
deposits.

Other Borrowings
Other borrowings increased to $21.7 million in 1998 versus $17.1 in 1997. The
majority of this growth was the result of borrowings of $7.8 million used in
part to finance the acquisition of Belvidere. Approximately, $6.0 million of
this borrowing is at a fixed rate, requiring principal and interest payments of
approximately $900,000 per year for five years. An additional $1.8 million bears
interest at a variable rate based upon the monthly LIBOR rate. At the end of
five years, both parts of the loan are due. At the Company's discretion, part or
all of variable portion could be converted to the fixed rate or paid without
penalty. This loan is secured with the stock of the Bank. Other long-term
borrowings also increased as a result of additional Federal Home Loan Bank
("FHLB") borrowings and FHLB borrowings assumed in the Belvidere acquisition.
The Bank took additional FHLB borrowings early in 1998 to meet current and
projected liquidity needs.


                                       11
<PAGE>   12
Short-term borrowings consist of repurchase agreements and fed funds purchased.
From time-to-time the Bank will buy fed funds to meet short-term liquidity needs
and to manage its Federal Reserve Bank account. The average balance of
short-term borrowings decreased considerably during 1998. This was the result of
fewer customers using repurchase agreements to invest their excess funds. No
significant change is expected during 1999.

Asset/Liabilities Management
The Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest bearing liabilities, with short and medium term
maturities, mature or reprice more rapidly, or on a different basis, than its
interest earning assets. Interest rate risk occurs when there is an imbalance
between the interest earning assets and the interest bearing liabilities at a
given maturity or repricing schedule. Such imbalance is commonly referred to as
interest rate gap ("gap"). A positive gap exists when there are more assets than
liabilities maturing or repricing within the same time frame.

Generally, in a negative gap position, net interest income will decline during
periods of rising interest rates and increase during periods of declining
interest rates. The opposite would be expected in a positive gap position.
However, with current interest rates at a historically low level, certain
liabilities are not as interest rate sensitive and therefore offset the earnings
change anticipated in the gap analysis. The Company's cumulative one-year gap
generally has been and currently is negative.

The Asset Liability Committee meets regularly to monitor and determine the
Company's exposure to interest rate fluctuations. Monitoring the maturities and
repricings of assets and liabilities, the flow of funds, and the relationship of
interest rate changes of loans and deposits to the general market does this. The
consolidated interest rate risk exposure is monitored by the Company on a
quarterly basis.

Liquidity
Liquidity as it relates to the subsidiary bank is a measure of its ability to
fund loans and withdrawals of deposits in a cost-effective manner. The Bank's
principal source of funds are deposits, scheduled amortization and prepayment of
loan principal, maturities of securities, income from operations, and short-term
borrowings. Additional sources include purchasing fed funds, sale of loans, sale
of securities, borrowing from the Federal Reserve Bank and the FHLB and capital
loans. Current year earnings can be paid to the Bank, from Nevahawk, to provide
additional liquidity, without incurring a tax liability under present law.
During 1998 and 1997 Nevahawk did not pay a dividend. A payment in 1999 is also
not anticipated.

Generally, the liquidity needs of the Company consist of payment of dividends to
its shareholders, the repayment of debt used for the Belvidere acquisition and a
limited amount of expenses. The sources of funds to provide this liquidity are
income from cash balances, dividends from the Bank and a $2.0 million line of
credit with a non-affiliated third-party bank. To date, this line of credit has
not been used. Certain restrictions are imposed upon banks, which could limit
their ability to pay dividends if they do not generate future net earnings. The
Company maintains adequate liquidity to pay its expenses. In addition, the
Company may also borrow from external sources leveraging its strong capital
base.

Capitol
Total shareholders' equity as of December 31, 1998 increased 5.5% to $24.4
million as compared to $23.1 million as of December 31, 1997. Internal growth in
the form of increased net income was the biggest factor for this increase. Also
contributing to the increase, to a lesser extent, was the exercising of stock
options by employees and an increase in the adjustment for Financial Accounting
Standard 115. Tier I capital ratio, total capital ratio and Tier I leverage
ratio were 8.36%, 9.31% and 6.00%, respectively, at December 31, 1998 compared
to 15.26%, 16.35% and 10.99%, respectively, at December 31, 1997. The change in
these ratios, between years, reflects the effect of the Belvidere acquisition in
which the Company chose to leverage its capital to complete the transaction. The
Company still exceeds all regulatory requirements regarding capital as the
regulatory requirement for Tier I capital as a percent of assets is 4.0% and for
total capital as a percent of risk based assets is 8.00%.

Impact of Inflation and Changing Prices
Unlike most industrial companies, most of the assets and liabilities of the Bank
are monetary in nature. Consequently, interest rates have more significant
impact on the Company's performance and results of operations than the effect of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the Consumer Price Index. As discussed previously under
Asset/Liability Management, the Bank's interest rate gap position in conjunction
with the direction of the movement in interest rates, is an important factor in
the Company's results of operations. The Company's financial statements are
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars, without giving consideration to changes in the relative
purchasing power of money over time due to inflation.

Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all derivative
financial instruments be recognized as either assets or liabilities in the
statement of financial position. Derivative financial instruments not designed
as hedges will be measured at fair value with changes in fair value being
recognized in earnings in the period of change. If a derivative is designated as
a hedge, the accounting for changes

                                       12
<PAGE>   13


in fair value will depend on the specific exposure being hedged. The statement
is effective for fiscal years beginning after June 15, 1999. Management, at this
time, cannot determine the effect the adoption of this statement may have on the
financial statements of the Company as the effect is dependent on the amount and
nature of derivatives and hedges held at the time of adoption of the statement.

Year 2000 Issues
Year 2000 ("Y2K") issues affect the Company to the extent that it operates in an
industry which heavily relies upon information technology systems and has
material relationships with third parties, both vendors and customers.
Therefore, the Company has undertaken a four-phase process to determine to what
extent the Company is vulnerable to Y2K issues. The four phases set-forth by the
Company are awareness by major area, assessment of Y2K compliance, system
renovation (if necessary) and validation of Y2K preparedness. The Company's Y2K
progress, by major area, is set-forth in the table that follows.

     System                Awareness  Assessment    Renovation        Validation
     General                                        
     Ledger                Complete     Complete    Complete          Complete
     Loan                                           
     System                Complete     Complete    Complete          Complete
     Deposit                                        
     System                Complete     Complete    Complete          Complete
     Item                                           
     Capture               Complete     Complete    Complete          Complete
     Hardware Complete     Complete                 In Process        June `99
     Individual                                     
     Loan                                           
     Customers             Complete     Complete    Basis             Ongoing

The Company has approved a budget for $600,000 for the cost of hardware and
software remediation. A majority of these costs were planned expenditures to
upgrade existing hardware and software regardless of Y2K. Most of these funds
have been expended and will be amortized over the useful life of the asset.

As is shown in the table, the Company has completed a majority of the validation
phase of several critical areas. A Y2K contingency plan has been formulated. The
validation processes completed indicate that mission critical systems are Y2K
compliant. If the results of the validation processes not yet completed lead
management to believe otherwise, then a contingency plan, with a timetable will
be implemented for those additional areas.

Because of the potential negative effect of Y2K non-compliance by some of the
Bank customers, the Bank has implemented an external Y2K awareness campaign that
provides them with information that will assist them in becoming compliant.
Requests have been sent to larger commercial customers to provide the bank with
information as to their status of compliance.

Private Securities Litigation Reform Act of 1995
When used in this report, the words "believes," "expects," and similar
expressions are intended to identify forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Factors which could cause such a variance to occur include, but are
not limited to, changes in interest rates, levels of consumer bankruptcies,
customer loan and deposit preferences, and other general economic conditions

Item 7 Financial Statements and Supplemental Data
Incorporated by reference to pages through of this report on Form 10-KSB.

TABLE 1
Years Ended December 31,

<TABLE>
<CAPTION>
       Average Balance              Average Rate                                                      Interest Earned or Paid
   1998       1997     1996     1998    1997    1996                                                   1998    1997     1996
                                                         Interest Earning Assets:
<S>           <C>      <C>       <C>     <C>     <C>     <C>                                           <C>      <C>      <C>  
    39,313     35,778  35,510    6.31%   6.52%   5.98%   Taxable investment securities                 2,482    2,331    2,123
     5,992      3,394   4,862    6.53%   6.33%   6.66%   Tax-exempt investment securities                391      215      324

    45,306     39,172  40,372    6.34%   6.50%   6.06%     Total investments                           2,873    2,546    2,447

</TABLE>

                                      13

<PAGE>   14

<TABLE>
<S>           <C>      <C>       <C>     <C>     <C>     <C>                                           <C>      <C>      <C>  
   153,600    125,403  95,042    9.10%   9.25%   9.24%   Loans                                        13,976   11,597    8,777
     6,948      2,678   3,957    5.39%   5.29%   5.05%   Federal funds sold & short term investments     375      142      200
     4,460      2,103      43    5.15%   4.09%   4.65%   Interest bearing deposits in banks              230       86        2

   210,315    169,356 139,414    8.30%   8.49%   8.20%   TOTAL EARNING ASSETS                         17,453   14,371   11,426


                                                       Interest Bearing Liabilities:
    13,776     10,786   4,933    1.18%   1.40%   1.44%   Interest bearing demand deposits                162      151       71
    47,645     34,960  30,056    3.19%   3.05%   3.05%   Savings deposits                              1,519    1,065      917
   102,083     80,557  62,005    5.77%   5.85%   5.79%   Time deposits                                 5,888    4,715    3,590

   163,504    126,303  96,994    4.63%   4.70%   4.72%     Total interest bearing deposits             7,569    5,931    4,578

     6,897     11,651  12,411    5.28%   5.25%   5.18%   Short-term borrowings                           364      612      643
    10,795      2,999   2,754    5.60%   5.90%   6.28%   Long-term borrowings                            604      177      173

   181,196    140,953 112,159    4.71%   4.77%   4.81% TOTAL INTEREST BEARING LIABILITIES              8,538    6,720    5,394

                                 3.59%   3.72%   3.39% INTEREST RATE SPREAD

                                                       NET INTEREST MARGIN/
                                 4.24%   4.52%   4.33%    NET INTEREST INCOME                          8,915    7,651    6,032
</TABLE>


<TABLE>
<CAPTION>
                                                 1998 Compared to 1997                       1997 Compared to 1996
                                         Increase (Decrease) due to                  Increase (Decrease) Due to
                                                             Rate/                                       Rate/
                                           Rate     Volume   Volume       Net         Rate     Volume   Volume       Net
Interest Earning Assets:
<S>                                        <C>       <C>      <C>       <C>          <C>       <C>       <C>       <C>
  Taxable investment securities             (72)        230     (7)        151         191          16       1         208
  Tax-exempt investment securities            6         165      5         176         (16)        (98)      5        (109)

    Total investments                       (66)        395     (2)        327         175         (82)      6          99

  Loans                                    (189)      2,612    (45)      2,379          38       2,783      (2)      2,820
  Federal funds sold & short term             3         226      4         233          10         (65)     (3)        (58)
investments
  Interest bearing deposits in banks         22          97     25         143          (0)         96     (11)         84

TOTAL EARNING ASSETS                       (230)      3,330    (18)      3,082         222       2,732     (10)      2,945


Interest Bearing Liabilities:
  Interest bearing demand deposits          (24)         42     (7)         11          (2)         84      (3)         80
  Savings deposits                           50         386     18         454          (1)        150      (0)        148
  Time deposits                             (69)      1,260    (18)      1,173          39       1,074      12       1,125

    Total interest bearing deposits         (43)      1,688     (7)      1,638          36       1,308       9       1,353

  Short-term borrowings                       2        (250)    (1)       (248)          9         (39)     (1)        (31)
  Long-term borrowings                       (9)        460    (24)        427         (10)         15      (1)          4
</TABLE>


                                       14

<PAGE>   15

<TABLE>
<S>                                        <C>       <C>      <C>       <C>          <C>       <C>       <C>       <C>
TOTAL INTEREST BEARING LIABILITIES          (50)      1,899    (32)      1,817          35       1,284       8       1,326
NET INTEREST MARGIN                        (180)      1,431     14       1,265         188       1,448     (18)      1,618
</TABLE>


TABLE 2
ANALYSIS OF LOAN PORTFOLIO

<TABLE>
<CAPTION>
(in thousands)                                                                      December 31,
                                                      1998                       1997                       1996
                                                                Percent of                  Percent of               Percent of
                                                     Amount          Total      Amount           Total      Amount         Total
<S>                                                  <C>              <C>        <C>             <C>        <C>             <C>     
Real estate-mortgage                                 130,924          72.58%     83,398          60.98%     55,475          56.33%  
Real estate-construction                               3,535           1.96%      3,956           2.89%      1,343           1.36%
Real estate-held-for-sale                              4,362           2.42%      1,024           0.75%        240
Consumer                                              26,532          14.71%     25,006          18.28%     19,586          19.89%
Commercial                                            17,131           9.50%     25,333          18.52%     23,023          23.38%
                                                 
Gross loans                                          182,484         101.16%    138,717         101.42%     99,667         100.96%
                                                 
Unearned income                                         (180)         (0.10%)      (420)          0.00%       --             0.00%
Allowance for loan loss                               (1,915)         (1.06%)    (1,523)         (1.11%)    (1,186)         (1.20%)
                                                 
Net loans                                            180,389         100.00%    136,774         100.00%     98,481          99.76%
</TABLE>
                           
ALLOCATION OF ALLOWANCE FOR LOAN LOSS BY CATEGORY

<TABLE>
<CAPTION>
                                                                     Percent                   Percent                    Percent
                                                                     of Gross                  of Gross                   of Gross
                                                                     Loans by                  Loans by                   Loans by
                                                     Amount          Category    Amount        Category     Amount        Category
<S>                                                     <C>            <C>          <C>          <C>           <C>          <C>     
Real estate-mortgage                                    705            36.81%       545          35.78%        540          45.53%  
Real estate-construction                                  0             0.00%         0           0.00%          0           0.00%
Consumer                                                644            33.63%       353          23.18%        173          14.59%
Commercial                                              566            29.56%       625          41.04%        473          39.88%
Commercial paper                                          0             0.00%         0           0.00%          0           0.00%
                                                                                                                         
Total                                                 1,915           100.00%     1,523         100.00%      1,186         100.00%
</TABLE>
    
SUMMARY OF LOAN LOSS EXPERIENCE  

<TABLE>
<CAPTION>
                                                                  December 31,
                                                        1997         1996         1996
<S>                                                    <C>          <C>            <C>
Allowance for loan losses, beginning                   1,523        1,186          929
Amounts associated with acquisition                      452          321
Amounts charged-off:
   Real estate-mortgage                                    1          110            0
   Consumer                                              180          104           98
   Commercial                                            214            1           11
</TABLE>


                                       15
<PAGE>   16

<TABLE>
<S>                                                    <C>          <C>            <C>
     Total charge-offs                                   395          215          109

Recoveries on amounts previously charged-off:
   Real estate-mortgage                                    0            2            0
   Consumer                                               13           17           40
   Commercial                                              7           20          181
     Total recoveries                                     20           39          221
     Net charge-offs                                     375          176         (112)
Provision charged to expense                             315          192          145
Allowance for loan losses, ending                      1,915        1,523        1,186

NON-PERFORMING LOANS AT PERIOD END
Impaired loans                                         1,479          325          445
Non-accrual                                              857          610          443
Past due 90 days or more and still accruing              240          143          252
   Total non-performing loans                          2,576        1,078        1,140

RATIOS
Allowance for loan loss to period-end loans            1.08%        1.11%         1.19%
Net charge-offs to average loans                       0.24%        0.14%        (0.12%)
Recoveries to charge-offs                              5.06%       18.14%       202.75%
Non-performing loans to gross loans                    1.41%        0.78%         1.14%

EFFECT ON INTEREST INCOME OF NON-ACCRUAL LOANS
Income recognized                                         33           34           30
Income that would have been recognized in                 76           78           52
  accordance with the original loan terms
</TABLE>


TABLE 3
OTHER INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                               1998                           1997                           1996
                                                      % of                           % of                           % of
                                                     Average                        Average                        Average
(in thousands)                         Amount         Assets          Amount         Assets          Amount         Assets
<S>                                     <C>            <C>             <C>            <C>             <C>            <C>  
Non-interest expense                    7,757          3.37%           5,909          3.23%           4,214          2.83%
Non-interest income                     2,499          1.09%           1,536          0.84%           1,006          0.68%

Net non-interest expense                5,258          2.28%           4,373          2.39%           3,208          2.15%
</TABLE>

TABLE 4
Three-Year Comparison of Average Balance Sheets

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                      1998                      1997                      1996
                                                          Percent of                Percent of                 Percent of
(in thousands)                                 Amount       Total        Amount       Total        Amount        Total
<S>                                            <C>        <C>            <C>        <C>             <C>         <C>  
ASSETS:
</TABLE>


                                       16


<PAGE>   17

<TABLE>
<S>                                            <C>          <C>          <C>          <C>           <C>          <C>     
   Federal funds sold
     and short term investments                6,948        3.02%        2,678        1.46%         3,957        2.66%
   Interest bearing deposits
    in banks                                   4,460        1.94%        2,103        1.15%            43        0.03%
   Taxable investment securities
    securities                                39,313       17.10%       35,793       19.55%        35,475       23.85%
   Tax-exempt investment
    securities                                 5,992        2.61%        3,394        1.85%         4,862        3.27%
  Loans, net of unearned
    income                                   153,600       66.82%      124,008       67.74%        94,034       63.23%

     Total earning assets                    210,315       91.49%      167,976       91.76%       138,371       93.04%

   Cash and due from banks                     7,988        3.47%        6,426        3.51%         5,196        3.49%
   Bank premises and equipment                 5,544        2.41%        4,305        2.35%         3,463        2.33%
   Other non-earning assets                    6,039        2.63%        4,361        2.38%         1,685        1.13%

     Total non-earning assets                 19,572        8.51%       15,092        8.24%        10,344        6.96%

TOTAL ASSETS                                 229,886      100.00%      183,068      100.00%       148,715      100.00%
<CAPTION>


LIABILITIES AND STOCKHOLDERS' EQUITY/CAPITAL
LIABILITIES:
<S>                                         <C>          <C>          <C>          <C>           <C>          <C>     
   Interest bearing demand                    13,776        5.99%       10,786        5.89%         4,933        3.32%
   Savings accounts                           47,645       20.73%       34,960       19.10%        30,056       20.21%
   Time deposits                             102,083       44.41%       80,557       44.00%        62,005       41.69%

    Total interest bearing
     deposits                                163,504       71.12%      126,303       68.99%        96,994       65.22%

   Short-term borrowings                       6,897        3.00%       11,651        6.36%        12,411        8.35%
   Long-term borrowings                       10,795        4.70%        2,999        1.64%         2,754        1.85%

    Total interest bearing
      liabilities                            181,196       78.82%      140,953       76.99%       112,159       75.42%

   Non-interest bearing deposits              21,941        9.54%       16,510        9.02%        13,725        9.23%
   Other liabilities                           3,252        1.41%        2,902        1.59%           957        0.64%

    Total liabilities                        206,389       89.78%      160,365       87.60%       126,841       85.29%

  Stockholders' Equity/Capital                23,497       10.22%       22,703       12.40%        21,874       14.71%

TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY                       229,886      100.00%      183,068      100.00%       148,715      100.00%
</TABLE>

TABLE 5
INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                           December 31,
                                                1998           1997           1996
<S>                                              <C>          <C>             <C>  
Available-for-Sale
US Treasury                                      504          1,252           2,758
US Government Agency                          27,511          7,389           6,727
Tax-exempt obligations                           163              0               0
</TABLE>



                                       17

<PAGE>   18

<TABLE>
<S>                                           <C>               <C>           <C>  
Other securities                              10,297            847           1,217

Total market value of
 investment securities                        38,475          9,488          10,702

Held-to-Maturity
US Treasury                                    5,058         10,191          11,403
US Government Agency                           8,895         13,900           9,341
Tax-exempt obligations                         8,135          4,341           3,118
Other securities                                   0            488           1,003

Total book value of
 investment securities                        22,088         28,920          24,865

Total market value of
 investment securities                        21,896         29,073          24,939

Total Securities                              60,563         38,408          35,567
</TABLE>


TABLE 6
MATURITY OF INVESTMENT SECURITIES
December 31, 1998

<TABLE>
<CAPTION>
                                     Within               After One but         After Five but                                    
                                    One Year              Within Five Years     Within Ten Years    After Ten Years       
                                     Amount    Yield      Amount      Yield     Amount     Yield    Amount      Yield     Amount  
<S>                               <C>          <C>        <C>        <C>        <C>        <C>      <C>         <C>        <C>    
Available-for-Sale                                                                                                                
US Treasury                             504    6.06%            0     0.00%           0    0.00%          0     0.00%           0 
US Government Agency                  3,453    5.47%       12,138     5.74%       2,048    6.25%      9,872     6.21%           0 
Tax-exempt obligations                    0    0.00%          161     5.93%           0    0.00%          0     0.00%           0 
Other securities                      7,193    5.54%        1,010     5.92%           0    0.00%          0     0.00%       2,094 
                                                                                                                                  
Total                                11,150    5.54%       13,309     5.75%       2,048    6.25%      9,872     6.21%       2,094 
                                                                                                                                  
                                                                                                                                  
Held-to-Maturity                                                                                                                  
US Treasury                           2,992    7.57%        2,005     6.03%           0    0.00%          0     0.00%           0 
US Government Agency                      0    0.00%          500     5.38%         502    5.80%      7,872     6.95%           0 
Tax-exempt obligations                  235    4.70%        5,567     4.22%       2,223    4.38%          0     0.00%           0 
Other securities                          0    0.00%            0     0.00%           0    0.00%          0     0.00%           0 
                                                                                                                                  
Total                                 3,227    7.36%        8,072     4.74%       2,725    4.64%      7,872     6.95%           0 
                                                                                                                                  
Grand Total                          14,377    5.95%       21,381     5.37%       4,773    5.33%     17,744     6.54%       2,094 

<CAPTION>

                                       No Fixed
                                       Maturity
                                       Yield      Amount      Yield
<S>                                    <C>        <C>          <C>  
Available-for-Sale                  
US Treasury                            0.00%          504      6.06%
US Government Agency                   0.00%       27,511      5.91%
Tax-exempt obligations                 0.00%          161      5.93%
Other securities                       5.83%       10,297      5.63%
                                    
Total                                  5.83%       38,473      5.84%
                                    
                                    
Held-to-Maturity                    
US Treasury                            0.00%        4,997      6.95%
US Government Agency                   0.00%        8,874      6.79%
Tax-exempt obligations                 0.00%        8,025      4.28%
Other securities                       0.00%            0      0.00%
                                    
Total                                  0.00%       21,896      5.91%
                                    
Grand Total                            5.83%       60,368      5.86%
</TABLE>

TABLE 7
MATURITY AND INTEREST SENSITIVITY OF LOANS
December 31,1998

                                       18

<PAGE>   19

<TABLE>
<CAPTION>
                                                                                                        Greater than
(in thousands)                                 Time Remaining to Maturity                                 one year
                                                 After one                                          Fixed         Floating
                              Due Within        but Within        After Five                      Interest        Interest
                               One Year         Five Years           Years          Total           Rate            Rate

<S>                                  <C>                 <C>             <C>           <C>              <C>              <C>  
Real estate-mortgage                 38,268              52,697          23,076        114,041          68,530           7,243
Real estate-construction              3,886                  45               0          3,931              45               0
Consumer                             12,300              15,155             122         27,577          15,106             171
Commercial                           25,962              10,793               0         36,755          10,658             135

Gross Loans                          80,416              78,690          23,198        182,304          94,339           7,549
</TABLE>

TABLE 8
COMPOSITION OF DEPOSITS AND INTEREST RATES PAID

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                              1998                             1997                            
                                            Average   Percent of  Average    Average    Percent of   Average   
(in thousands)                              Balance      Total     Rate      Balance      Total       Rate     
<S>                                        <C>           <C>       <C>       <C>         <C>        <C>        
Non-interest bearing demand deposits        21,941       11.83%     --        16,510       11.56%     --       
Interest bearing demand deposits            13,776        7.43%    1.18%      10,786        7.55%       1.40%  
Savings deposits                            47,645       25.69%    3.19%      34,960       24.48%       3.05%  
Time deposits                              102,083       55.05%    5.77%      80,557       56.41%       5.85%  
                                          
Total                                      185,445      100.00%    4.63%     142,813      100.00%       4.70%  
<CAPTION>
                                          
                                                                 Years Ended December 31,
                                                            1996
                                            Average     Percent of    Average
(in thousands)                              Balance       Total         Rate
<S>                                        <C>           <C>
Non-interest bearing demand deposits         13,725       12.40%      --
Interest bearing demand deposits              4,933        4.46%        1.44%
Savings deposits                             30,056       27.15%        3.05%
Time deposits                                62,005       56.00%        5.79%
                                          
Total                                       110,719      100.00%        4.72%
</TABLE>

TABLE 9                                   
MATURITY OF TIME DEPOSITS                 
<TABLE>
<CAPTION>
December 31, 1998                                                 Time Remaining to Maturity
                                      
                                    Due Within        Four to          Seven to              After             Total
                                   Three Months      Six Months      Twelve Months       Twelve Months
<S>                                     <C>            <C>                 <C>                 <C>            <C>
Certificates of Deposit
  Less than $100,000                    23,361         13,134              27,318              46,573         110,386
  More than $100,000                     5,174          2,631               3,016               6,649          17,470

Total                                   28,535         15,765              30,334              53,222         127,856
</TABLE>

TABLE 10
Short-term Borrowings

<TABLE>
<CAPTION>
                                               1998        1997         1996
Balance outstanding December 31,
<S>                                           <C>        <C>           <C>  
Repurchase agreements                         4,576      10,256        7,405
Fed funds purchased                               0       1,975            0
                                        -------------------------------------
                                              4,576      12,231        7,405
                                        =====================================

Weighted rate December 31,
Repurchase agreements                         4.51%       5.28%        5.01%
</TABLE>



                                       19

<PAGE>   20

<TABLE>
<S>                                           <C>         <C>          <C>  
Fed funds purchased                           0.00%       5.96%        0.00%
                                        -------------------------------------
                                              4.51%       5.39%        5.01%
                                        =====================================


Maximum month-end outstanding balance
Repurchase agreements                        11,387      17,038       17,202
Fed funds purchased                           1,600       4,150        6,000


Year-to-date average amount outstanding
Repurchase agreements                         6,411       1,087       11,970
Fed funds purchased                             486      10,564          441
                                        -------------------------------------
                                              6,897      11,651       12,411
                                        =====================================

Year-to-date average weighted rate
Repurchase agreements                         5.20%       5.25%        5.16%
Fed funds purchased                           6.34%       5.25%        5.71%
                                        -------------------------------------
                                              5.28%       5.25%        5.18%
                                        =====================================
</TABLE>

TABLE 11

<TABLE>
<CAPTION>
                                                     Two-        Four-       Seven-       Ten-        Over
December 31, 1998                        One         three        six         nine       twelve        one
(in thous)                              Month       months      months       months      months       year        Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>       <C>            <C>           <C>        <C>          <C>   
Federal funds sold and
 short-term investments                    15,335                                                                    15,335
Interest bearing deposits                   8,190                                                                     8,190
Taxable investment securities               9,115       5,179       1,499          189         253      35,765       52,000
Tax-exempt investment
 securities                                     0           0           0            0         235       8,063        8,298
Loans                                      28,028       9,183      14,577       12,126      16,502     101,888      182,304

Total interest-earning assets              60,668      14,362      16,076       12,315      16,990     145,716      266,127

Interest bearing demand deposits           18,427                                                                    18,427
Savings deposits                           61,206                                                                    61,206
Time deposits                               7,724      20,811      15,765       14,566      15,768      53,222      127,856
Repurchase agreements and fed
 funds purchased                            4,576                                                                     4,576
Long-term borrowings                          800                                                       16,323       17,123

Total interest-bearing liabilities         92,733      20,811      15,765       14,566      15,768      69,545      229,188

Net gap                                  (32,065)     (6,449)         311      (2,251)       1,222      76,171       36,939
Cumulative Gap                           (32,065)    (38,514)    (38,203)     (40,454)    (39,232)      36,939
% of total assets                        (11.00%)    (13.21%)    (13.11%)     (13.88%)    (13.46%)      12.67%
</TABLE>

TABLE 12

<TABLE>
<CAPTION>
                                                     1998        1997      Regulatory
                                                    Ratio        Ratio    Requirement
<S>                                                 <C>         <C>         <C>  
Equity as a percent of assets                          10.22%      12.40%     N/A
</TABLE>


                                       20

<PAGE>   21
<TABLE>
<S>                                                     <C>        <C>           <C>  
Core capital as a percent of risk based assets          8.36%      17.43%        4.00%
Total capital as a percent of risk based assets         9.31%      18.67%        8.00%
Leverage ratio                                          6.00%      11.79%        3.00%
</TABLE>

TABLE 13
Selected Financial Ratios
<TABLE>
<CAPTION>
                                                                1998         1997        1996        1995         1994
<S>                                                                <C>          <C>         <C>         <C>          <C>  
Return on average assets                                           8.70%        1.07%       1.16%       1.05%        0.70%
Return on average equity                                           8.33%        8.61%       7.85%       7.06%        4.63%
Average equity to average assets                                  10.22%       12.40%      14.54%      13.62%       14.10%
Dividend payout ratio                                             53.41%       50.00%      50.67%      46.88%       65.57%
Interest rate spread                                               3.59%        3.72%       3.39%       3.39%        3.38%
Net interest margin                                                4.24%        4.52%       4.33%       4.27%        4.19%
Net non-interest expense to assets                                 2.29%        2.38%       2.15%       2.86%        3.15%
Efficiency ratio                                                  68.82%       64.76%      60.76%      64.13%       73.67%
Allowance for loan losses to total loans at end of period          1.08%        1.11%       1.19%       0.98%        0.91%
</TABLE>


                                       21

<PAGE>   22


ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE

Not Applicable

                                    PART III

ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
       REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

(a)      Directors of the registrant. The information that will appear under
         "Election of Directors" in the definitive Proxy Statement to be
         prepared and filed for the Company's Annual Meeting of Stockholders on
         May 19, 1999 is incorporated herein by this reference.

(b)      Executive officers of the Registrant. The information presented in Item
         I of this report is incorporated herein by this reference.

ITEM 10  EXECUTIVE COMPENSATION

The information that will appear under "Director and Executive Compensation" in
the definitive Proxy Statement to be prepared and filed for the Company's Annual
Meeting of Stockholders on May 19, 1999 is incorporated herein by this
reference.

ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information that will appear under "Beneficial Ownership of Securities" in
the definitive Proxy Statement to be prepared and filed for the Company's Annual
Meeting of Stockholders on May 19, 1999 is incorporated herein by this
reference.

ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information that will appear under "Certain Transactions with Management and
Others" in the definitive Proxy Statement to be prepared and filed for the
Company's Annual Meeting of Stockholders on May 19, 1999 in incorporated herein
by this reference.


ITEM 13  EXHIBITS AND REPORTS FORM 8-K

(a)      Documents Filed:

1 and 2. Financial Statements. See the following "Index to Financial
Statements," which is incorporated herein by this reference.

3.       Exhibits.  See "Exhibit Index" which is incorporated herein by this 
reference.

(b)      Reports On Form 8-K:
         There were no reports filed on Form 8-K during the fourth quarter of
1998.




                                       22
<PAGE>   23


SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 31, 1998.

                                        Blackhawk Bancorp, Inc.




                                        By /s/ James P. Kelley                  
                                          ------------------------------- 
                                          James P. Kelley
                                          Executive Vice President and
                                          Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on.




Principal Executive Officer and Director:
  Director, President and                   /s/ Dennis M Conerton         
Chief Executive Officer                    -------------------------------
                                           Dennis M. Conerton, 
                                           President and Chief Executive 
                                           Officer


Principal Financial Officer, Accounting
  Officer and Director:                    /s/ Jesse L Calkins 
                                           --------------------------------
                                           Jesse L. Calkins,
                                           Senior Vice President
                                           Treasurer and Chief Financial
                                           Officer




Directors:


/s/ John B. Clark                                           /s/ James P. Kelley
-----------------                                           -------------------
    John B. Clark                                               James P. Kelley

/s/ H. Daniel Green                                         /s/ Fred Klett
-------------------                                         --------------
    Dr. H. Daniel Green                                         Fred Klett

/s/ Charles Hart                                            /s/ George Merchant
----------------                                            -------------------
    Charles Hart                                                George Merchant

/s/ Kenneth A Hendricks                                     /s/
-----------------------                                     --------------------
    Kenneth A. Hendricks                                        Roger Taylor



                                       23


<PAGE>   24


Blackhawk Bancorp, Inc.

Index To Financial Statements And Financial Statement Schedules

The following Consolidated Financial Statements of the Blackhawk Bancorp, Inc.
are located in Item 7 of this 10-KSB. 10-KSB page as indicated:

                                     Annual
                                  Report Pages

Report of Independent Public Accountants....................................16
Consolidated Balance Sheets - December 31, 1997
  and 1996..................................................................17

Consolidated Statements of Income for the years ended
  December 31, 1997, 1996 and 1995..........................................18

Consolidated Statements of Stockholders' Equity for
  the years ended December 31, 1997, 1996 and 1995.........................19-20

Consolidated Statements of Cash Flows for the years
  ended December 31, 1997, 1996 and 1995...................................21-22

Notes to the Consolidated Financial Statements.............................23-45




                                       24

<PAGE>   25







                             Blackhawk Bancorp, Inc.
                                Exhibit Index To
                        1996 Annual Report on Form 10-KSB
<TABLE>
<CAPTION>

                                                                                         Filed
Exhibit                                           Incorporated Herein                    Here-            Page
Number          Description                       By Reference To:                       with             No.
------          -----------                       ----------------                       ----             ---
<S>             <C>                               <C>                                    <C>              <C> 

3.1             Amended and Restated              Exhibit 3.1 to
                Articles of Incorporation         Amendment No. 1 to
                of Blackhawk Bancorp, Inc.        Registration Statement on Form
                                                  S-1(Reg. No. 33.32351)

3.2             By-Laws of Blackhawk              Exhibit 3.2 to Amendment No. 1
                Bancorp, Inc., as                 to Registration Statement on
                amended.                          Form S-1


3.3             Amendments to By-Laws             Exhibit 3.3 to 1994 Form 10-KSB
                of Blackhawk Bancorp,             dated March 29, 1995
                Inc., as amended.

3.4             Amendments to By-Laws of          Exhibit 3.4 to 1994 Form 10-KSB
                Blackhawk Bancorp, Inc., as       dated March 29, 1995.
                amended.

4.1             Sections 15 and 19 of Plan        Exhibit 1.2 to Amendment No. 1
                of Conversion of Beloit           to Registration Statement on
                Savings Bank, as amended          Form-1 (No. 33-32351) filed on
                                                  March 5, 1990.

10.12           Blackhawk State Bank              Exhibit 10.12 to 1996 Form
                Officer Bonus Plan, as            10-KSB, dated March 28, 1997
                amended

10.2            Written description of Plan       Proxy Statement for its Annual
                for Life Insurance of             Meeting of Stockholders, on May
                Blackhawk State Bank              8, 1991, dated April 4, 1991

                                                   
10.3            Blackhawk Bancorp, Inc.           Exhibit 10.3 to 1990 Form 10-K,   
                Employee Stock Ownership          dated March 31, 1990          
                Plan                                                               
                                                                                    
10.31           Amendment to Blackhawk            Exhibit 10.31 to 1994 Form        
                Bancorp, Inc. Employee            10-KSB, dated March 29, 1995  
                Stock Ownership Plan                                             
                                                                                    
10.4            Blackhawk Bancorp, Inc.           Exhibit 10.4 to Amendment No. 
                Employee Stock Ownership          1 to Registration  Statement  
                Trust                             Form S-1 (No. 33-32351)        
                                                  
</TABLE>




                                       25




<PAGE>   26
<TABLE>
<CAPTION>
                                                                                         Filed
Exhibit                                           Incorporated Herein                    Here-            Page
Number          Description                       By Reference To:                       with             No.
------          -----------                       ----------------                       ----             ---
<S>             <C>                               <C>                                    <C>              <C> 
                                                   
10.5            Blackhawk Bancorp, Inc.            Exhibit 10.5 to Amendment No.       
                Directors' Stock Option Plan       1 to Registration Statement              
                                                   Form S-1 (No. 33-32351)                     
                                                                                                 
                                                                                                 
10.6            Blackhawk Bancorp, Inc.            Exhibit 10.6 to Registration               
                Executive Stock Option Plan        Statement Form S-1 (No.                     
                                                   33-32351)                                     
                                                                                                 
                                                                     
10.7            Form of Severance   Payment        Exhibit 10.8 to Amendment No.             
                Agreement entered into             1 to Registration Statement               
                between  Blackhawk State           Form S-1 (No. 33-32351)                     
                Bank and Messrs. Calkins,                                                        
                Kelley and Rusch                                                                 
                                                                                                 
10.71           Form of Severance Payment          Exhibit 10.8 to 1994 Form 10-KSB,             
                Agreement entered into             dated March 29, 1995                                     
                between  Blackhawk State                                                         
                Bank and Mr. Conerton                                                            
                                                                                                 
                                                                     
10.8            Blackhawk Bancorp, Inc.            Exhibit 10.9 to 1994 Form 10-KSB,             
                Directors' Stock Option Plan       dated March 29, 1995                          
                                                                                                 
10.9            Blackhawk Bancorp, Inc.                                                        
                Executive Stock Option Plan                                                     
                                                                                                 

13              1998 Annual Report To              Proxy Statement for its Annual                                               
                Stockholders                       Meeting of Stockholders on May                                               
                                                   13, 1998, dated April 2, 1998                  
                                                                   
22              Subsidiaries of                                                                  
                Registrant                                                                       
                                                                                                            
23              Proxy Statement for its            Proxy Statement for its Annual
                Annual Meeting of                  Meeting of Stockholders on May                
                Stockholders on May 19, 1999       13, 1998, dated April 2, 1998               X 
</TABLE>
                                                   
                                              


                                       26

<PAGE>   27




                             BLACKHAWK BANCORP, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 1998


<PAGE>   28



                   Index To Consolidated Financial Statements



                                                                    Page
                                                                    ----

INDEPENDENT AUDITOR'S REPORT                                         3

FINANCIAL STATEMENTS

         Consolidated Balance Sheets                                 4

         Consolidated Statements of Income                           5

         Consolidated Statements of  Shareholders' Equity            6

         Consolidated Statements of Cash Flows                       7

         Notes to  Consolidated Financial Statements                8-22






                                       2
<PAGE>   29

                          INDEPENDENT AUDITOR'S REPORT



Board of Directors and Shareholders
Blackhawk Bancorp, Inc.
Beloit, Wisconsin


We have audited the accompanying consolidated balance sheet of Blackhawk
Bancorp, Inc. and Subsidiary as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Blackhawk Bancorp, Inc. and Subsidiary as of and for each of the two years in
the period ended December 31, 1997, were audited by other auditors whose report
dated February 20, 1998, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blackhawk
Bancorp, Inc. and Subsidiary at December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.




/s/ Wipfli Ullrich Bertelson LLP

Wipfli Ullrich Bertelson LLP
January 21, 1999
Green Bay, Wisconsin







                                       3
<PAGE>   30




                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                                    1998                1997       
                                                                                                    ----                ----
<S>                                                                                          <C>                <C>             
ASSETS                                                                                       $     15,973,000   $      8,680,000
Cash and cash equivalents                                                                          15,335,000          8,889,000
Federal Funds sold and other short-term investments                                        
Securities:                                                                                                      
   Available-for-sale                                                                              38,475,000          9,488,000
   Held-to-maturity                                                                                21,896,000         28,920,000
Loans held for sale                                                                                 4,362,000          1,024,000
Loans, net of allowance for loan losses of $1,915,000 in 1998 and $1,523,000 in 1997              176,027,000        135,750,000 
Bank premises and equipment, net                                                                    7,483,000          4,353,000
Accrued interest receivable                                                                         1,908,000          1,467,000
Other intangible assets                                                                             8,152,000          1,850,000
Other assets                                                                                        1,857,000          1,555,000
                                                                                             ----------------   ----------------
   Total Assets                                                                              $    291,468,000   $    201,976,000
                                                                                             ================   ================
LIABILITIES AND SHAREHOLDERS' EQUITY                                                       
         Deposits:                                                                         
                  Non-interest bearing                                                       $     33,110,000   $     19,572,000
                  Interest Bearing                                                                208,285,000        139,479,000
                                                                                             ----------------   ----------------
                  Total Deposits                                                                  241,395,000        159,051,000
                                                                                             ----------------   ----------------
         Borrowed funds:                                                                   
                  Short-term borrowings                                                             4,576,000         12,231,000
                  Long-term borrowings                                                             17,123,000          4,850,000
                                                                                             ----------------   ----------------
                           Total Borrowed Funds                                                    21,699,000         17,081,000
                                                                                             ----------------   ----------------
         Accrued interest payable                                                                   1,046,000            892,000
         Other liabilities                                                                          2,928,000          1,817,000
                                                                                             ----------------   ----------------
                           Total Liabilities                                                      267,068,000        178,841,000
                                                                                             ----------------   ----------------
SHAREHOLDERS' EQUITY                                                                       
         Preferred stock, $.01 par value per share;  authorized                            
                  1,000,000 shares; issued, none                                                            -                  -
         Common stock, $.01 par value per share; authorized                                
                  10,000,000 shares; issued 2,313,373 in 1998 and 2,296,414 in 1997                    23,000             23,000
         Additional paid in capital                                                                 7,099,000          7,002,000
         Employee stock options earned                                                                130,000            131,000
         Retained earnings                                                                         16,975,000         16,045,000
         Less 10,324 and 9,278 shares of treasury stock, at cost,                                                
                  at December 31, 1998 and 1997, respectively                                        (120,000)          (104,000)
         Accumulated other comprehensive income                                                       293,000             38,000
                                                                                             ----------------   ----------------
                  Total Shareholders' Equity                                                       24,400,000         23,135,000
                                                                                             ----------------   ----------------
                  Total Liabilities and Shareholders' Equity                                   $  291,468,000     $  201,976,000
                                                                                               ==============     ==============
</TABLE>


                 See Notes to Consolidated Financial Statements



                                       4
<PAGE>   31




                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                          1998              1997             1996
                                                                          ----              ----             ----
Interest Income:
<S>                                                                  <C>              <C>               <C>          
   Interest and fees on loans                                        $    13,975,000  $     11,597,000  $   8,777,000
   Interest on securities:
     Taxable                                                               2,482,000        2,433,000       2,123,000
     Exempt from federal income taxes                                        265,000          152,000         221,000
   Interest on federal funds sold and other short-term investments           604,000          126,000         202,000
                                                                     ---------------  ---------------   -------------
     Total interest income                                                17,326,000       14,308,000      11,323,000
                                                                     ---------------  ---------------   -------------

Interest Expense:
   Interest on deposits                                                    7,569,000        5,931,000       4,578,000
   Interest on short-term borrowings                                         364,000          612,000         643,000
   Interest on long-term borrowings                                          621,000          177,000         173,000
                                                                     ---------------  ---------------   -------------
     Total interest expense                                                8,554,000        6,720,000       5,394,000
                                                                     ---------------  ---------------   -------------
     Net interest income                                                   8,772,000        7,588,000       5,929,000

Provision for loan losses                                                    315,000          192,000         145,000
                                                                     ---------------  ---------------   -------------
     Net interest income after provision for loan losses                   8,457,000        7,396,000       5,784,000
                                                                     ---------------  ---------------   -------------
Other Operating Income:
   Trust department income                                                   201,000          168,000         122,000
   Service charges and fees                                                1,096,000          897,000         569,000
   Loan servicing fees                                                       286,000           95,000               -
   Gain on sale of loans                                                     443,000           65,000          75,000
   Other income                                                              473,000          311,000         240,000
                                                                     ---------------  ---------------   -------------
     Total other operating income                                          2,499,000        1,536,000       1,006,000
                                                                     ---------------  ---------------   -------------

Other Operating Expenses:
   Salaries and wages                                                      3,352,000         2,436,000      1,768,000
   Employee benefits                                                         648,000           631,000        437,000
   Occupancy expense, net                                                    588,000           426,000        309,000
   Furniture and equipment                                                   522,000           329,000        350,000
   Data processing                                                           542,000           445,000        320,000
   Professional fees                                                         169,000           342,000        199,000
   Advertising and marketing                                                 171,000           139,000        113,000
   Amortization of intangible assets                                         358,000           137,000              -
   Other operating expenses                                                1,407,000         1,024,000        718,000
                                                                     ---------------  ----------------  -------------
     Total other operating expenses                                        7,757,000         5,909,000      4,214,000
                                                                     ---------------  ----------------  -------------
     Income before income taxes                                            3,199,000         3,023,000      2,576,000
   Provision for income taxes                                              1,189,000         1,067,000        848,000
                                                                     ---------------  ---------------   -------------
         Net Income                                                  $     2,010,000  $      1,956,000  $   1,728,000
                                                                     ===============  ================  =============

         Basic Earnings Per Share                                    $           .88  $           .86   $         .76
                                                                     ===============  ===============   =============
         Diluted Earnings Per Share                                  $           .83  $           .82   $         .73
                                                                     ===============  ===============   =============
         Dividends Per Share                                         $           .47  $           .43   $         .38
                                                                     ===============  ===============   =============
</TABLE>

See Notes to Consolidated Financial Statements.




                                       5
<PAGE>   32

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                   YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



<TABLE>
<CAPTION>
                                                                     Additional                                          
                                                          Common       Paid in       Stock       Retained      Treasury  
                                                          Stock        Capital      Options      Earnings       Stock    
<S>                                                    <C>           <C>          <C>           <C>          <C>         
Balance, December 31, 1995                             $  23,000     $6,946,000   $   52,000    $14,210,000  $        -  
Net Income                                                                                       1,728,000               
Principal payments on ESOP loan                                                                                          
Cash dividends declared on common stock, $.38 per                                                (866,000)               
share
Purchase of stock for treasury, 7,578 shares at                                                                (84,000)  
$11.13 per share
Other comprehensive (loss)                                                                                               
Compensatory employee stock options:
    Recognized                                                                        43,000                             
    Exercised or expired                                                 14,000                                          
                                                       ---------     ----------   ----------    ----------   ----------  

Balance, December 31, 1996                                23,000      6,960,000       95,000    15,072,000     (84,000)  
NET INCOME                                                                                       1,956,000               
PRINCIPAL PAYMENTS ON ESOP LOAN                                                                                          
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.43 PER                                                (983,000)               
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,700 SHARES AT                                                                (20,000)  
$11.69 PER SHARE
Other comprehensive income                                                                                               
COMPENSATORY EMPLOYEE STOCK OPTIONS:
         RECOGNIZED                                                                   36,000                             
         EXERCISED OR EXPIRED                                            42,000                                          
                                                       ---------     ----------   ----------    ----------   ----------  
Balance, December 31, 1997                                23,000      7,002,000      131,000    16,045,000    (104,000)  
NET INCOME                                                                                       2,010,000               
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.47 PER                                               (1,080,000)              
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,046 SHARES AT                                                                (16,000)  
$15.00 PER SHARE
Other comprehensive income                                                                                               
COMPENSATORY EMPLOYEE STOCK OPTIONS:
         EXERCISED OR EXPIRED                                            97,000       (1,000)                            
                                                       ---------     ----------       -------   ----------   ----------  
Balance, December 31, 1998                             $  23,000     $7,099,000   $  130,000    $16,975,000  $(120,000)  
                                                       =========     ==========   ==========    ===========  ==========  

<CAPTION>
                                                    Accumulated
                                                       Other
                                                    Comprehensive
                                                      Income
                                                     (Deficit)      Other         Total
<S>                                                 <C>          <C>           <C>        
Balance, December 31, 1995                          $   37,000   $(79,000)     $21,189,000
Net Income                                                                       1,728,000
Principal payments on ESOP loan                                     53,000          53,000
Cash dividends declared on common stock, $.38 per                                (866,000)
share
Purchase of stock for treasury, 7,578 shares at                                   (84,000)
$11.13 per share
Other comprehensive (loss)                            (48,000)                    (48,000)
Compensatory employee stock options:
    Recognized                                                                      43,000
    Exercised or expired                                                            14,000
                                                    ----------   ---------     -----------

Balance, December 31, 1996                            (11,000)    (26,000)      22,029,000
NET INCOME                                                                       1,956,000
PRINCIPAL PAYMENTS ON ESOP LOAN                                     26,000          26,000
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.43 PER                                (983,000)
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,700 SHARES AT                                   (20,000)
$11.69 PER SHARE
Other comprehensive income                              49,000                      49,000
COMPENSATORY EMPLOYEE STOCK OPTIONS:
         RECOGNIZED                                                                 36,000
         EXERCISED OR EXPIRED                                                       42,000
                                                    ----------   ---------     -----------
Balance, December 31, 1997                              38,000           -      23,135,000
NET INCOME                                                                       2,010,000
CASH DIVIDENDS DECLARED ON COMMON STOCK, $.47 PER                              (1,080,000)
SHARE
PURCHASE OF STOCK FOR TREASURY, 1,046 SHARES AT                                   (16,000)
$15.00 PER SHARE
Other comprehensive income                             255,000                     255,000
COMPENSATORY EMPLOYEE STOCK OPTIONS:
         EXERCISED OR EXPIRED                                                       96,000
                                                    ----------   ---------     -----------
Balance, December 31, 1998                          $  293,000   $       -     $24,400,000
                                                    ==========   =========     ===========
</TABLE>


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.




                                       6
<PAGE>   33
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES                                    1998              1997             1996
                                                                        ----              ----             ----
<S>                                                                     <C>             <C>             <C>         
    Net Income                                                          $  2,010,000    $  1,956,000    $  1,728,000
    Adjustments to reconcile net income to net cash provided by
       (used in) operating activities:
         Compensatory employee stock options recognized                       (1,000)         36,000          43,000
         Provision for loan losses                                           315,000         192,000         145,000
         Provision for depreciation and amortization                         791,000         476,000         333,000
         Amortization of premiums and (accretion of discounts) on            (92,000)       (112,000)        (80,000)
            investment securities, net
         Gain on sale of property and equipment                                 --              --            (3,000)
         Gain on sale of loans                                              (443,000)        (65,000)        (75,000)
         Loans originated for sale                                       (34,938,000)    (11,372,000)     (5,329,000)
         Proceeds from sale of loans                                      30,127,000      10,654,000       5,164,000
         Change in assets and liabilities:
         Decrease in accrued interest receivable                              62,000           2,000         176,000
         (Increase) decrease in other assets                                (845,000)        565,000        (183,000)
         Increase in accrued interest and other liabilities                  209,000          34,000         179,000
                                                                        ------------    ------------    ------------
         Net cash provided by (used in) operating activities              (2,805,000)      2,366,000       2,098,000
                                                                        ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
         Proceeds from sale of property and equipment                           --              --            12,000
         Proceeds from maturity of securities available-for-sale
                                                                          22,798,000       7,824,000      22,484,000
         Proceeds from maturity of securities held-to-maturity
                                                                          13,248,000      20,723,000      11,815,000
         Purchase of securities available-for-sale                       (28,892,000)     (6,242,000)    (21,628,000)
         Purchase of securities held-to-maturity                          (4,831,000)    (21,139,000)    (10,873,000)
         Net cash used in acquisitions                                    (7,140,000)       (444,000)           --
         (Increase) decrease in federal funds sold and other
         short-term investments, net                                      (4,212,000)
                                                                                           1,579,000       7,057,000
         Loans originated, net of principal collected                     (1,077,000)     (4,598,000)
                                                                                                           5,499,000
         Purchase of bank premises and equipment                            (848,000)       (298,000)        (73,000)
                                                                        ------------    ------------    ------------
                  Net cash provided by (used in) investing activities      1,413,000      (4,865,000)      4,196,000
                                                                        ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
         Net increase (decrease) in deposits                              (3,253,000)     (1,406,000)      7,066,000
         Net increase (decrease) in short-term borrowings                 (7,655,000)      4,826,000      (2,275,000)
         Proceeds from long-term borrowings                               10,400,000       3,500,000            --
         Payments on long-term borrowings                                   (127,000)       (900,000)     (1,300,000)
         Dividends paid                                                   (1,080,000)       (983,000)       (866,000)
         Proceeds from issuance of common stock                               97,000          42,000          14,000
         Purchase of common stock for treasury                               (16,000)        (20,000)        (84,000)
                                                                        ------------    ------------    ------------
                  Net cash provided by (used in) financing activities      8,685,000       3,212,000      (5,917,000)
                                                                        ------------    ------------    ------------
                  Increase in cash and cash equivalents                    7,293,000         713,000         377,000
Cash and cash equivalents:
         Beginning                                                         8,680,000       7,967,000       7,590,000
                                                                        ------------    ------------    ------------
         Ending                                                         $ 15,973,000    $  8,680,000    $  7,967,000
                                                                        ============    ============    ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
         Cash payments for:
                  Interest                                              $  8,849,000    $  7,264,000    $  5,407,000
                  Income taxes                                             1,016,000         341,000         878,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
         Financing activities
         Other assets acquired in settlement of loans                        637,000         292,000         226,000
         Principal payments on ESOP Loan                                        --            26,000          53,000
         Purchase of net assets
                  Fair value of non cash assets                           83,258,000      45,595,000
                  Liabilities assumed                                     78,335,000      45,451,000
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.




                                       7
<PAGE>   34
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            The accompanying consolidated financial statements conform to
            generally accepted accounting principles and to general practices
            within the banking industry. The following is a description of the
            more significant accounting policies:

            NATURE OF BANKING ACTIVITIES:

            The Company provides a variety of banking services to individuals
            and businesses through its eleven facilities in Beloit, Wisconsin
            and Belvidere, Rockford, Roscoe, Oregon and Rochelle, Illinois. Its
            primary deposit products are demand deposits, savings, and
            certificates of deposit and its primary lending products are
            commercial, real estate mortgage and installment loans.

            As of December 31, 1998 and 1997, 74% and 71% , respectively, of the
            gross loan portfolio consisted of real estate loans on real estate
            located in Southcentral Wisconsin and Northcentral Illinois.
            Generally, these loans are expected to be repaid from the cash flows
            of the borrowers and are collateralized by the related property.
            Credit losses arising from real estate lending transactions compare
            favorably with Blackhawk's credit loss experience on its loan
            portfolio as a whole. However, adverse changes in the local economy
            would have a direct impact on the credit risk in the loan portfolio.

            PRINCIPLES OF CONSOLIDATION:

            The accompanying consolidated financial statements include the
            accounts of Blackhawk Bancorp, Inc. and its wholly owned subsidiary,
            Blackhawk State Bank (Blackhawk) and Blackhawk's wholly owned
            subsidiaries Nevahawk Investment, Inc., and RSL, Inc., Midland
            Acceptance Corporation, and First Financial Services, Inc. All
            significant intercompany transactions and accounts have been
            eliminated in consolidation.

            On September 1, 1998, the Company acquired for cash all of the
            outstanding shares of First Financial Bancorp, Inc. and its
            wholly-owned subsidiaries. The total acquisition cost was
            $12,690,000. The excess of the total acquisition cost over the fair
            value of the net assets acquired of $2,951,000 is being amortized
            over 20 years by the straight-line method. The acquisition has been
            accounted for as a purchase and the results of operations of First
            Financial since the date of acquisition are included in the
            Consolidated Financial Statements. The assets of First Financial
            were subsequently merged into the Company.

            The unaudited proforma effect of the transaction had it occurred
            prior to 1997 is as follows: (dollars in thousands, except per share
            information)

<TABLE>
<CAPTION>
                                                              1998              1997
                                                              ----              ----
            Net interest income:
<S>                                                   <C>               <C>         
                     Blackhawk Bancorp, Inc.          $      8,772      $      7,588
                     First Financial Bancorp, Inc.           1,253             1,997
                                                      ------------      ------------
                     Total                            $     10,025      $      9,585
                                                      ============      ============
            Net income:
                     Blackhawk Bancorp, Inc.          $      2,010      $      1,956
                     First Financial Bancorp, Inc.            (530)             (613)
                                                      ------------      ------------
                     Total                            $      1,480      $      1,343
                                                      ============      ============
            Basic Earnings per share:
                     Blackhawk Bancorp, Inc.          $        .88      $        .86
                     First Financial Bancorp, Inc.            (.24)             (.27)
                                                      ------------      ------------
                     Total                            $        .64      $        .59
                                                      ============      ============
            Diluted earnings per share:
                     Blackhawk Bancorp, Inc.          $        .83      $        .82
                     First Financial Bancorp, Inc.            (.22)             (.26)
                                                      ------------      ------------
                     Total                            $        .61      $        .56
                                                      ============      ============
</TABLE>



            On April 30, 1997, the Company acquired for cash all of the
            outstanding shares of Rochelle Bancorp, Inc. and its wholly-owned
            subsidiaries. The total acquisition cost was $4,319,000. The excess
            of the total acquisition cost over the fair value of the net assets
            acquired of $1,934,000 is being amortized over 10 to 20 years by the
            straight-line method. The acquisition has been accounted for as a
            purchase and the results of operations of Rochelle since the date of
            acquisition are included in the consolidated financial statements.
            The assets of Rochelle Bancorp, Inc. were subsequently merged into
            the Company.

            USE OF ESTIMATES:

            The preparation of financial statements in conformity with generally
            accepted accounting principles requires management to make estimates
            and assumptions that affect the reported amounts of assets and
            liabilities and disclosure of contingent assets and liabilities at
            the date of the financial statements and the reported amounts of
            revenues and expenses during the reporting period. Actual results
            could differ from those estimates.



                                       8
<PAGE>   35
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         STATEMENTS OF CASH FLOWS:

            For the purpose of reporting cash flows, cash and cash equivalents
            includes cash on hand and amounts due from banks (including cash
            items in process of clearing). Cash flows from federal funds sold
            and other short-term investments, with an original maturity of less
            than three months, loans, deposits, and short-term borrowings with
            an original maturity of less than three months, are reported net
            under general practices within the banking industry.

         SECURITIES AVAILABLE-FOR-SALE:

            Securities classified as available-for-sale are those debt
            securities that the Company intends to hold for an indefinite period
            but not necessarily to maturity. Any decision to sell a security
            classified as available-for-sale would be based on various factors,
            including significant movements in interest rates, changes in the
            maturity mix of the Company's assets and liabilities, liquidity
            needs, regulatory capital considerations, and other similar factors.
            Securities available-for-sale are carried at fair value. Unrealized
            holding gains and losses on securities available-for-sale are
            reported as accumulated other comprehensive income within
            shareholders' equity until realized. Realized gains or losses,
            determined on the basis of the cost of specific securities sold, are
            included in earnings.

         SECURITIES HELD-TO-MATURITY:

            Securities classified as held-to-maturity are those debt securities
            the Company has both the intent and ability to hold to maturity
            regardless of changes in market conditions, liquidity needs or
            changes in general economic conditions. These securities are carried
            at cost adjusted for amortization of premium and accretion of
            discount, computed by the interest method over their contractual
            lives.

         LOANS:

            Loans are stated at unpaid principal balances, less the allowance
            for loan losses and net of deferred loan fees.

            Loan origination fees exceeding related costs are deferred and
            amortized over the contractual life of the loan as a yield
            adjustment.

            Mortgage loans held for sale are recorded at the lower of cost or
            fair market value. Gains and losses on the sale of mortgage loans
            are included in other non-interest income.

            The accrual of interest on impaired loans is discontinued when, in
            management's opinion, the borrower may be unable to meet payments as
            they become due. When interest accrual is discontinued, all unpaid
            accrued interest is reversed. Interest income is subsequently
            recognized only to the extent it is received in cash.

            The allowance for loan losses is maintained at a level which, in
            management's judgment, is adequate to absorb credit losses inherent
            in the loan portfolio. The amount of the allowance is based on
            management's evaluation of the collectibility of the loan portfolio,
            including the nature of the portfolio, credit concentrations, trends
            in historical loss experience, specific impaired loans, and economic
            conditions. Allowances for impaired loans are generally determined
            based on collateral values (or the present value of estimated cash
            flows). Because of uncertainties inherent in the estimation process,
            management's estimate of credit losses inherent in the loan
            portfolio and the related allowance may change materially in the
            near term. The allowance is increased by a provision for loan
            losses, which is charged to expense and reduced by charge-offs, net
            of recoveries. Changes in the allowance relating to impaired loans
            are charged or credited to the provision for loan losses.

         SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING:

            The Company sells first mortgage loans with yield rates to the buyer
            based upon the current market rates which may differ from the
            contractual rate on the loans sold. At the time that loans are sold,
            a gain or loss is recorded which reflects the difference between the
            assumed cash flow to be generated by the contractual interest rates
            of the loans sold and the assumed cash flow resulting from the yield
            to be paid to the purchaser, adjusted for servicing and discounted
            to reflect present value. Loan servicing fees are recognized over
            the lives of the related loans. Real estate loans serviced for
            others are not included in the accompanying balance sheets.

         MORTGAGE SERVICING RIGHTS:

            The Company capitalizes the estimated value of mortgage servicing
            rights through the origination and sale of mortgage loans. When the
            originated mortgage loans are sold or securitized into the secondary
            market, the Company allocates the total cost of the mortgage loans
            between mortgage servicing rights and the loans, based on their
            relative fair values. The cost of mortgage servicing rights is
            amortized in proportion to, and over the period of, estimated net
            servicing revenues. Mortgage servicing rights





                                       9
<PAGE>   36

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)




NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         MORTGAGE SERVICING RIGHTS (CONTINUED)

            are periodically evaluated for impairment. For purposes of measuring
            impairment, the servicing rights are stratified into pools based on
            one or more predominant risk characteristics of the underlying loans
            including loan type, interest rate and term. Impairment represents
            the excess of carrying value of a stratified pool over its fair
            value, and is recognized through a valuation allowance. The fair
            value of each servicing rights pool is evaluated based on the
            present value of estimated future cash flows using a discount rate
            commensurate with the risk associated with that pool, given current
            market conditions. Estimates of fair value include assumptions about
            prepayment speeds, interest rates, and other factors, which are
            subject to change over time. Changes in these underlying assumptions
            could cause the fair value of mortgage servicing rights, and the
            related valuation allowance, to change significantly in the future.

         BANK PREMISES AND EQUIPMENT:

            Bank premises and equipment are stated at cost less accumulated
            depreciation. Depreciation is computed principally on a
            straight-line basis over the estimated useful life of each asset.
            Expenditures for maintenance and repairs are reflected as expense
            when incurred. Gains or losses and disposition of premises and
            equipment are reflected in income.


         OTHER REAL ESTATE:

            Other real estate is carried in other assets at the lower of cost or
            fair value less estimated disposal costs. When the property is
            acquired through foreclosure, any excess of the related loan balance
            over market value is charged to the allowance for loan losses. It is
            Blackhawk's policy to account for collateral that has been
            substantively repossessed in the same manner as collateral that has
            been formally repossessed. Subsequent write-downs or losses upon
            sale are charged to other operating expense.

         SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:

            The Bank enters into sales of securities under agreements to
            repurchase (reverse-repurchase agreements). Reverse-repurchase
            agreements are treated as financings, and the obligations to
            repurchase securities sold are reflected as a liability in the
            balance sheets. The securities underlying the agreements remain in
            the asset accounts.

         PENSION PLAN:

            Blackhawk has a defined-contribution plan which covers substantially
            all full-time employees. Costs of the plan are based on
            participants' eligibility and compensation and pension expense is
            recorded as benefits are earned.

         TRUST ASSETS:

            Assets held in a fiduciary or agency capacity are not included in
            the consolidated financial statements as they are not assets of
            Blackhawk.

         INCOME TAXES:

            The Company, Blackhawk and Blackhawk's subsidiaries file a
            consolidated federal income tax return and separate state income tax
            returns.

            Deferred taxes are provided on a liability method whereby deferred
            tax assets are recognized for deductible temporary differences and
            operating loss and tax credit carryforwards and deferred tax
            liabilities are recognized for taxable temporary differences.
            Temporary differences are the differences between the reported
            amounts of assets and liabilities and their tax basis. Deferred tax
            assets are reduced by a valuation allowance when, in the opinion of
            management, it is more likely than not that some portion or all of
            the deferred tax assets will not be realized. Deferred tax assets
            and liabilities are adjusted for the effects of changes in tax laws
            and rates on the date of enactment.

         EARNINGS PER SHARE DATA:

            The per share data is based on the weighted average number of common
            stock and common stock equivalents outstanding during each year.

         COMPREHENSIVE INCOME:

            Comprehensive income consists of net income and other comprehensive
            income. Other comprehensive income includes unrealized gains and
            losses on securities available for sale which are recognized as a
            separate component of equity, accumulated other comprehensive income
            (deficit).



                                       10
<PAGE>   37
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         FUTURE ACCOUNTING CHANGE

            In June 1998, the Financial Accounting Standards Board (FASB) issued
            Statement of Financial Accounting Standards (SFAS) No. 133,
            "Accounting for Derivative Instruments and Hedging Activities." This
            statement establishes accounting and reporting standards for
            derivative instruments and for hedging activities. This statement
            requires an entity to recognize all derivatives as either assets or
            liabilities in the balance sheet and measure those instruments at
            fair value. The accounting for changes in the fair value of a
            derivative depends on the intended use of the derivative and the
            resulting designation. This statement is effective for fiscal years
            beginning after June 15, 1999. Management, at this time, cannot
            determine the effect adoption of this statement may have on the
            consolidated financial statements of the Company as the accounting
            for derivatives is dependent on the amount and nature of derivatives
            in place at the time of adoption.

NOTE 2.  FUTURE ACCOUNTING CHANGES

            Effective January 1,1998, the Company adopted SFAS No. 130,
            "Reporting Comprehensive Income," which was issued in June 1997. In
            accordance with this statement, the Company reports those items
            defined as comprehensive income in the statement of changes in
            stockholders' equity. The adoption of SFAS No. 130 did not have an
            impact on the Company's financial position or results of operations.

            Effective January 1, 1998, the Company adopted SFAS No. 131,
            "Disclosures About Segments of an Enterprise and Related
            Information," which was issued in June 1997. This statement
            establishes new standards for reporting information about operating
            segments in annual and interim financial statements. The standard
            also requires descriptive information about the way operating
            segments are determined, the products and services provided by the
            segments, and the nature of differences between reportable segment
            measurements and those used for the consolidated enterprise. The
            disclosure requirements had no impact on the Company's financial
            position or results of operations.

NOTE 3.  SECURITIES

            Debt securities have been classified in the balance sheets according
            to management's intent as either available for sale or
            held-to-maturity. The carrying amount of securities and their
            approximate fair values at December 31, is as follows:

         AVAILABLE-FOR-SALE SECURITIES:

<TABLE>
<CAPTION>
                                                                              1998                                    
                                                                              ----                                    
                                                              Gross Unrealized    Gross Unrealized                          
                                            Amortized Cost          Gains               (Losses)            Fair Value
                                            --------------          -----               --------            ----------
<S>                                        <C>                  <C>                   <C>                   <C>         
         U.S. Treasury Securities          $    500,000         $      4,000          $       --            $    504,000
         U.S. Government Agencies            27,294,000              264,000               (47,000)           27,511,000
         Obligations of states and                                                                          
                  political subdivisions        161,000                2,000                  --                 163,000
         Other Securities                    10,212,000               90,000                (5,000)           10,297,000
                                           ------------         ------------          ------------          ------------
                                           $ 38,167,000         $    360,000          $    (52,000)         $ 38,475,000
                                           ============         ============          ============          ============
                                                                                                            
<CAPTION>
                                                                              1997
                                                                              ----                                    
                                                              Gross Unrealized    Gross Unrealized                          
                                            Amortized Cost          Gains               (Losses)            Fair Value
                                            --------------          -----               --------            ----------
<S>                                        <C>                  <C>                   <C>                   <C>         
         U.S. Treasury Securities          $  1,251,000         $      2,000          $       --            $  1,253,000
         U.S. Government Agencies             7,333,000               75,000               (20,000)            7,388,000
         Other Securities                       847,000                                                          847,000
                                           ------------         ------------          ------------          ------------
                                           $  9,431,000         $     77,000          $    (20,000)         $  9,488,000
                                           ============         ============          ============          ============
                                                                                                           
         HELD-TO-MATURITY SECURITIES:                                                                       
                                                                                                            
<CAPTION>
                                                                              1998                                    
                                                                              ----                                    
                                                              Gross Unrealized    Gross Unrealized                          
                                            Amortized Cost          Gains               (Losses)            Fair Value
                                            --------------          -----               --------            ----------
<S>                                        <C>                  <C>                   <C>                   <C>         
         U.S. Treasury Securities          $  4,997,000         $     61,000          $       --            $  5,058,000
         U.S. Government Agencies             8,874,000               33,000               (12,000)            8,895,000
         Obligations of states and                                                                          
                  political subdivisions      8,025,000              112,000                (2,000)            8,135,000
                                           ------------         ------------          ------------          ------------
                                           $ 21,896,000         $    206,000          $    (14,000)         $ 22,088,000
                                           ============         ============          ============          ============
                                                                                                            
<CAPTION>
                                                                              1997                                    
                                                                              ----                                    
                                                              Gross Unrealized    Gross Unrealized                          
                                            Amortized Cost          Gains               (Losses)            Fair Value
                                            --------------          -----               --------            ----------
<S>                                        <C>                  <C>                   <C>                   <C>         
         U.S. Treasury Securities          $ 10,191,000         $     97,000          $     (2,000)         $ 10,286,000
         U.S. Government Agencies            13,900,000               81,000               (13,000)           13,968,000
         Obligations of states and                                                                          
                  Political subdivisions      4,340,000               23,000                (8,000)            4,355,000
         Other Securities                       489,000              489,000                                
                                           ------------         ------------          ------------          ------------
                                           $ 28,920,000         $    201,000          $    (23,000)         $ 29,098,000
                                           ============         ============          ============          ============
</TABLE>


                                       11
<PAGE>   38
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 3.  SECURITIES (CONTINUED)

            The amortized cost and fair value of securities as of December 31,
            1998, by contractual maturity, are shown below. Maturities may
            differ from contractual maturities in mortgage-backed securities
            because the mortgages underlying the securities may be called or
            prepaid without any penalties. Therefore, these securities are not
            included in the maturity categories in the following maturity
            summary:

<TABLE>
<CAPTION>
                                                             Available-For-Sale               Held-to-Maturity       
                                                             ------------------               ----------------  
                                                    Amortized Cost      Fair Value    Amortized Cost       Fair Value
                                                    --------------      ----------    --------------       ----------
<S>                                                  <C>            <C>                 <C>             <C>          
            Due in one year or less                  $  10,558,000  $   10,649,000      $  3,727,000    $   3,755,000
            Due after one year through five years       13,756,000      13,766,000        10,921,000       11,021,000
            Due after five years through ten years       2,001,000       2,094,000         2,223,000        2,271,000
            Mortgage-backed securities                   9,838,000       9,872,000         5,025,000        5,041,000
            Other Securities                             2,014,000       2,094,000                 -                -
                                                     -------------   -------------    --------------   --------------
                                                     $  38,167,000  $   38,475,000    $   21,896,000   $   22,088,000
                                                     =============  ==============    ==============   ==============
</TABLE>


            There were no realized gains or losses on securities for 1998, 1997
            and 1996.

            Investment securities with an amortized cost of $19,941,000 and a
            fair value of $20,059,000, respectively, were pledged to secure
            public deposits, short-term borrowings, and other purposes required
            by law as of December 31, 1998.

NOTE 4.  LOANS

            The composition of the loan portfolio is as follows:

<TABLE>
<CAPTION>
                                                                            1998                  1997
                                                                            ----                  ----
<S>                                                                      <C>                  <C>          
            Real Estate - Mortgage                                       $ 130,924,000        $  96,995,000
            Real Estate - Construction                                       3,535,000            3,956,000
            Consumer                                                        26,532,000           25,086,000
            Commercial                                                      17,131,000           11,656,000
                                                                         -------------        -------------
                                                                         $ 178,122,000        $ 137,693,000

            Less:  Allowance for loan losses                                 1,915,000            1,523,000
                     Unearned Income                                           180,000              420,000
                                                                         -------------        -------------
                     Loans, Net                                          $ 176,027,000        $ 135,750,000
                                                                         =============        =============
</TABLE>

            Nonperforming loans includes loans which have been categorized by
            management as impaired and non-accruing because collection of
            interest is not assured, non-accruing loans (not considered impaired
            loans) and loans which are past-due ninety days or more as to
            interest and/or principal payments. The following summarizes
            information concerning nonperforming loans:

<TABLE>
<CAPTION>
                                                                             1998           1997
                                                                             ----           ----
<S>                                                                      <C>             <C>        
               Impaired Loans                                            $  1,479,000    $   325,000
               Non-accruing Loans                                             857,000        664,000
               Past due 90 days or more and still accruing                    240,000         90,000
                                                                         ------------    -----------
                        Total Non-Performing Loans                       $  2,576,000    $ 1,079,000
                                                                         =============   ===========
</TABLE>


            The average balance of loans classified as impaired totaled
            approximately $634,000 and $405,000 for the years ended December 31,
            1998 and 1997, respectively. The allowance for loan losses related
            to impaired loans amounted to approximately $100,000 and $115,000 at
            December 31, 1998 and 1997, respectively. Interest income on
            impaired loans of $31,000 and $30,000 was recognized for cash
            payments received in 1998 and 1997, respectively.

            The Company has $0 and $133,000 in commitments to loan additional
            funds to the borrowers of nonperforming loans for the years ended
            December 31, 1998 and 1997, respectively.




                                       12
<PAGE>   39
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)





NOTE 4.  LOANS (CONTINUED)
            The effect on interest income of the non-accruing loans is as
            follows:

<TABLE>
<CAPTION>
                                                                                   1998          1997           1996           
                                                                                   ----          ----           ----
<S>                                                                            <C>            <C>            <C>        
            Income recognized                                                  $    47,000    $    31,000    $    29,000
            Income that would have been recognized in
                     accordance with the original loan terms                        76,000         77,000         52,000
            A summary of transactions in the allowance for loan losses is as follows:
            Balance at beginning of year                                       $ 1,523,000    $ 1,186,000    $   929,000
            Acquired allowance for loan losses                                     452,000        321,000           --
                                                                               -----------    -----------    -----------
            Adjusted balance at beginning of year                                1,975,000      1,507,000        929,000
            Provision charged to expense                                           315,000        192,000        145,000
            Loans charged-off                                                     (395,000)      (216,000)      (109,000)
            Recoveries                                                              20,000         40,000        221,000
                                                                               -----------    -----------    -----------
           
            Balance at End of Year                                             $ 1,915,000    $ 1,523,000    $ 1,186,000
                                                                               ===========    ===========    ===========
</TABLE>

          
            Loans are made, in the normal course of business, to directors,
            executive officers, their immediate families and affiliated
            companies in which they are a principal shareholder (commonly
            referred to as related parties). The terms of these loans, including
            interest rates and collateral, are similar to those prevailing for
            comparable transactions and management believes they do not involve
            more than a normal risk of collectibility. Such direct and indirect
            loans are summarized as follows:

<TABLE>
<CAPTION>
                                                                                        1998                   1997
                                                                                        ----                   ----
<S>                                                                                  <C>                    <C>        
            Balance at beginning of year                                             $ 2,215,000            $ 1,910,000
            Loans acquired                                                                  --                  168,000
                                                                                     -----------            -----------
            Adjusted balance at beginning of year                                      2,215,000              2,077,000
            New loans                                                                  4,299,000              4,909,000
            Principal repayments                                                      (3,317,000)            (4,771,000)
                                                                                     -----------            -----------
                     Balance at End of Year                                          $ 3,197,000            $ 2,215,000
                                                                                     ===========            ===========
</TABLE>

            In addition, the Company has loan commitments to the aforementioned
            related parties of $2,754,000 and $1,683,000 in 1998 and 1997,
            respectively.

NOTE 5.  MORTGAGE SERVICING RIGHTS:

            The unpaid principal balance of mortgage loans serviced for others,
            which are not included on the consolidated balance sheets, was
            $132,691,000 and $55,087,000 at December 31, 1998 and 1997,
            respectively. Management believes that the remaining book value of
            mortgage servicing rights approximates the fair value at December
            31, 1998 and 1997.

            The following is an analysis of the activity for mortgage servicing
            rights for the years ended December 31, 1998 and 1997 respectively:


<TABLE>
<CAPTION>
                                                                                              1998             1997
                                                                                              ----             ----
<S>                                                                                        <C>              <C>      
            Balance at beginning of year                                                   $   545,000      $      --
            Mortgage servicing rights acquired through business combinations                   257,000          227,000
            Fair value of servicing rights acquired in purchases                               208,000          241,000
            Additions of originated mortgage servicing rights                                  544,000          135,000
            Amortization                                                                      (526,000)         (58,000)
                                                                                           -----------      -----------
            Balance at end of year                                                         $ 1,028,000      $   545,000
                                                                                           ===========      ===========
</TABLE>


NOTE 6.  BANK PREMISES AND EQUIPMENT

            A summary of bank premises and equipment is as follows:

<TABLE>
<CAPTION>
                                                                                           1998                 1997
                                                                                           ----                 ----
<S>                                                                                    <C>                   <C>        
            Land and Improvements                                                      $ 1,079,000           $   395,000
            Buildings and Improvements                                                   7,036,000             5,329,000
            Equipment                                                                    4,718,000             2,503,000
            Vehicles                                                                       211,000               192,000
                                                                                       -----------           -----------

                                                                                        13,044,000             8,419,000
            Less Accumulated Depreciation                                                5,561,000             4,066,000
                                                                                       -----------           -----------
                     Bank Premises and Equipment, Net                                  $ 7,483,000           $ 4,353,000
                                                                                       ===========           ===========
</TABLE>


            Depreciation charged to operating expenses was $433,000, $336,000,
            and $333,000 for the years ended December 31, 1998, 1997 and 1996,
            respectively.



                                       13
<PAGE>   40
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 7.  DEPOSITS

            Deposit accounts at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                       1998                     1997
                                                                                       ----                     ----
<S>                                                                                <C>                      <C>         
            Non-interest bearing demand                                            $ 33,110,000             $ 19,572,000
            Interest-bearing demand deposits                                         18,427,000               14,555,000
            Savings deposits                                                         30,108,000               20,804,000
            Money Market deposits                                                    30,338,000               16,467,000
            Time deposits                                                           129,412,000               87,653,000
                                                                                   ------------             ------------
            Total deposits                                                         $241,395,000             $159,051,000
                                                                                   ============             ============
</TABLE>



            The aggregate amount of short-term jumbo CDs, each with a minimum
            denomination of $100,000, was approximately $17,470,000 and
            $9,078,000 in 1998 and 1997, respectively. Interest expense on time
            deposits of $100,000 or more was approximately $724,000, $389,000
            and $356,000 for the years ended December 31, 1998, 1997 and 1996,
            respectively.

            At December 31, 1998, the scheduled maturities of CDs are as
            follows:

<TABLE>
<S>                                                     <C>         
            1999                                        $ 74,634,000
            2000                                          40,305,000
            2001                                           9,935,000
            2002                                           2,504,000
            2003 and thereafter                              478,000
                                                        ------------ 
                                                        $127,856,000
                                                        ============
</TABLE>


NOTE 8.  BORROWED FUNDS

            A summary of borrowed funds is as follows:

<TABLE>
<CAPTION>
                                                                                              1998             1997
                                                                                              ----             ----
<S>                                                                                        <C>               <C>      
            Term Loan                                                                      $ 7,673,000       $      --
            Secured Advances from Federal Home Loan Bank of Chicago:
                     Fixed rate of 6.26%, due 6/16/98                                             --             400,000
                     Fixed rate of 5.44%, due 1/10/99                                          800,000           800,000
                     Fixed rate of 7.12%, due 4/17/00                                          150,000           150,000
                     Fixed rate of 5.71%, due 6/18/02                                        2,000,000         2,000,000
                     Fixed rate of 5.20%, due 12/11/02                                       1,500,000         1,500,000
                     Fixed rate of 4.70% due 1/15/08, callable 1/15/99                       1,000,000              --
                     Fixed rate of 5.30% due 1/16/08, callable 1/16/03                       4,000,000              --
            Securities sold under an agreement to repurchase                                 4,576,000        10,256,000
            Federal funds purchased                                                               --           1,975,000
                                                                                           -----------       -----------
                                                                                           $21,699,000       $17,081,000
                                                                                           ===========       ===========
</TABLE>


            The scheduled principal maturities of borrowed funds at December 31,
            1998 are as follows:

<TABLE>
<S>                                                                 <C>         
            1999                                                    $  5,901,000
            2000                                                         710,000
            2001                                                         599,000
            2002                                                       4,139,000
            2003                                                       5,350,000
            After 2003                                                 5,000,000
                                                                    ------------
                                                                    $ 21,699,000
                                                                    ============
</TABLE>

            The term loan consists of a $6,000,000 loan with a fixed interest
            rate of 6.60% and a variable portion of $1,800,000 with a current
            rate of 7.10%. The loan requires quarterly principal and interest
            payments of $225,000 on the fixed portion and quarterly interest
            only payments on the variable portion. The total loan matures August
            21, 2003. Collateral for this loan consists of the stock of the
            Bank.

            A covenant placed upon the Company includes limitations on further
            mergers without consent of the lender. The lender could also
            immediately call the loan if the Bank's aggregate outstanding
            balance of classified assets exceeds 50% of primary capital, if the
            Bank's tangible capital were less than 5% of total tangible assets,
            if the Bank's non-performing assets were greater than 25% of primary
            capital or if the total equity of the Bank were less than $30
            million.

            Advances from the Federal Home Loan Bank of Chicago are
            collateralized by substantially all one-to-four family real estate
            loans.

                                       14
<PAGE>   41
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 9.  EMPLOYEE BENEFIT PLANS

         PENSION PLAN:

            Blackhawk has a noncontributory, defined contribution money-purchase
            pension plan covering substantially all of its employees. Blackhawk
            contributes, on behalf of the eligible employees, 4.2% of total
            annual compensation plus 4.2% of compensation in excess of $13,200.
            The total pension expense was $123,000, $104,000, and $78,000, for
            the years ended December 31, 1998, 1997 and 1996, respectively.

         EXECUTIVE BONUS PLAN:

            The Company has adopted a revised incentive bonus plan for officers
            providing cash bonuses based upon the financial performance of the
            Company and performance of the respective officers. Bonus
            compensation expense was $92,000, $127,000, $159,000 for the years
            1998, 1997 and 1996, respectively.



         STOCK OPTION PLANS:

            The Company has reserved shares of common stock for issuance to
            directors and key employees under incentive and non-qualified stock
            option plans. Options are granted at prices equal to the fair market
            value and 90% of the fair market value on the dates of grant for
            directors and key employees, respectively, and are exercisable in
            cumulative installments over a three year period. Other pertinent
            information related to the plans is as follows:

<TABLE>
<CAPTION>
                                                                     Weighted                Weighted                 Weighted
                                                                     --------                --------                 --------
                                                                      Average                 Average                  Average
                                                                      -------                 -------                  ------- 
                                                          1998         Price     1997          Price       1996         Price
                                                          ----         -----     ----          -----       ----         -----
<S>                                                     <C>         <C>          <C>         <C>          <C>         <C>      
            Shares under option,
              beginning of year                         295,576     $    7.59    275,776     $    7.02    262,235     $    6.72
            Granted during the year                      60,850         15.00     31,350         11.40     16,300         11.20
            Terminated and canceled                                                                      
              during the year                            (5,335)        11.38     (1,000)        11.25       (510)         5.85
            Exercised during the year                   (16,959)         5.74    (10,550)         3.92     (2,249)         5.25
                                                        -------     ---------   --------     ---------    -------     ---------
            Shares under option,                                                                         
              end of year                               334,132     $    8.98    295,576     $    7.59    275,776     $    7.02
                                                        =======     =========   ========     =========   ========     =========
            Options exercisable,                                                                         
              end of year                               252,281     $    7.32    217,592     $    6.57     84,492     $    5.73
                                                        =======     =========   ========     =========   ========     =========
            Available to grant,                                                                          
              end of year                               338,150                   84,000                  115,300
                                                       ========                 ========                 ========
            Weighted average fair value                                                                  
              of options granted                                                                     
                during the year                                     $    1.34                $    5.74                $    4.58
                                                                    =========                =========
</TABLE>


            Compensation expense related to granting compensatory employee stock
            options totaled $1,000, $36,000, and $43,000 in 1998, 1997 and 1996,
            respectively.

<TABLE>
<CAPTION>
                                                            Outstanding Options                     Vested Options
                                                            -------------------                     --------------
                                    Year of          Outstanding             Weighted                              Weighted
                                   Expiration       Shares Granted         Average Price    Shares Vested        Average Price
                                   ----------       --------------        -------------     -------------        -------------
<S>                                                 <C>                    <C>              <C>                  <C>   
                                      2000               4,200                $ 3.33            4,200                $ 3.33
                                      2001              16,950                  3.16           16,950                  3.16
                                      2002               5,250                  4.33            5,250                  4.33
                                      2003              93,249                  5.26           93,249                  5.26
                                      2004               7,350                  6.83            7,350                  6.83
                                      2005             106,633                  9.38          106,633                  9.37
                                      2006              16,300                 11.20           10,866                 11.20
                                      2007              23,350                 11.41            7,783                 11.41
                                      2008              60,850                 15.00               --                    --
                                                       -------                ------          -------                ------
                                                       334,132                $ 8.98          252,281                $ 7.32
                                                       =======                ======          =======                ======
</TABLE>






                                       15
<PAGE>   42

                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 9.  EMPLOYEE BENEFIT PLANS (CONTINUED)

            The Company applies APB Opinion No. 25 in accounting for its stock
            options. Had compensation costs been determined on the basis of fair
            value pursuant to FASB Statement No. 123, net income and earnings
            per share would have been reduced as follows:

<TABLE>
<CAPTION>
                                                 1998              1997                1996
                                                 ----              ----                ----
              Net Income:
<S>                                          <C>                <C>                 <C>         
                       As reported           $  2,010,000       $  1,956,000        $  1,728,000
                       Pro Forma                1,898,000          1,862,000           1,644,000 
              Earnings Per Share:
                       As reported:
                                Basic        $        .88       $        .86        $        .73
                                             ============       ============        ============
                                Diluted      $        .83       $        .81        $        .69
                                             ============       ============        ============
                       Pro Forma:
                                Basic        $        .85       $        .82        $        .71
                                             ============       ============        ============
                                Diluted      $        .80       $        .78        $        .67
                                             ============       ============        ============
</TABLE>


            The fair value of each stock option grant has been estimated on the
            date of grant using the Black-Scholes option pricing model with the
            following weighted-average assumptions:

<TABLE>
<CAPTION>
                                             1998               1997             1996
                                             ----               ----             ----
<S>                                         <C>               <C>               <C>     
              Risk-free interest rate             5%                5%                5%
              Expected Life                 10 years          10 years          10 years
              Expected Volatility                17%               29%                3%
              Expected Dividend Yield             3%                3%                3%
</TABLE>

         EMPLOYEE STOCK OWNERSHIP PLAN:

            The Company has an Employee Stock Ownership Plan for the benefit of
            employees who meet the eligibility requirements. The Plan was
            established in 1990. The Plan holds 112,101 shares of the Company's
            common stock in a trust established in Blackhawk. The stock was
            acquired by the Plan by using the proceeds from a loan obtained from
            a nonrelated commercial lender. The loan was collateralized by the
            stock which has not been allocated to individual participant
            accounts. In addition, the Company quaranteed this obligation. Cash
            payments to the Plan consist of contributions and dividend payments,
            in amounts sufficient for it to satisfy the debt service
            requirements. Accordingly, the debt has been recorded in the
            accompanying consolidated balance sheets together with the related
            deferred compensation. The debt and deferred compensation are
            reduced as the Plan makes principal payments.

            The loan required principal payments of $13,000, plus interest each
            quarter and was paid in full at December 31, 1997.

            Cash payments to the Plan during the years ended December 31, 1998,
            1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                                           1998          1997         1996
                                           ----          ----         ----
<S>                                     <C>         <C>           <C>        
              Contributions             $  36,000   $    36,000   $    33,000
              Dividends                    38,000        38,000        36,000
                                        ---------   -----------   -----------

                                           74,000        74,000        69,000
                                        =========   ===========   ===========
</TABLE>


            For financial statement purposes, expense for the Plan is determined
            based on the percentage of shares allocated to participants each
            period (allocations are based on principal and interest payments)
            times the original amount of the debt plus the interest incurred.
            The components of the amount charged to expense for the years ended
            December 31, 1998, 1997 and 1996 are as follows:


<TABLE>
<CAPTION>
                                           1998        1997         1996
                                           ----        ----         ----
<S>                                     <C>         <C>          <C>       
              Compensation              $   36,000  $  36,000    $   32,545
              Interest                           -          -         5,022
                                        ----------  ---------    ----------

                                        $   36,000  $  36,000    $   37,567
                                        ==========  =========    ==========
</TABLE>


            In accordance with the applicable federal income tax regulations,
            Blackhawk is expected to honor the rights of certain participants to
            diversify their vested account balances or to liquidate their vested
            ownership of the stock in the event of employment termination. The
            purchase price of the stock is based on the market value. In
            addition, the deferred compensation recorded in connection with the
            debt incurred by the Plan has been offset against the stock.

         401(K) PROFIT-SHARING PLAN:

            Rochelle and Belvidere have profit-sharing plans which meets the
            qualifications of Section 401(k) of the Internal Revenue Code
            (Code). Under the Plan, employees 21 years of age or older with one
            year of service and 1,000 hours of service during that period may
            make pre-tax contributions up to applicable limits under the Code.
            Employees are 100% vested in their contributions. Discretionary
            employer contributions vest at a rate of 20% per year beginning on
            the third year of service by an employee. Contributions totaling
            $12,000 and $10,000 were made during the years ended December 31,
            1998 and 1997, respectively.

                                       16
<PAGE>   43
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)



NOTE 9.  EMPLOYEE BENEFIT PLANS (CONTINUED)

         DEFERRED COMPENSATION PLAN:

            In addition, Blackhawk assumed deferred compensation agreements with
            certain officers of Rochelle. Amounts are accumulated in an account
            from which benefits will be paid to the officers at termination or
            retirement. As of December 31, 1998 and 1997 deferred compensation
            liability totaled $273,000 and 251,000, respectively.

            The agreements also provide for an acceleration of benefits upon the
            deaths of these officers, payable to their beneficiaries. Rochelle
            has purchased life insurance policies on the lives of the officers
            in order to fund the acceleration of benefits at death. Rochelle is
            owner and beneficiary of these policies which provide for death
            benefits totaling $1,307,000 and $1,303,000 as of December 31, 1998
            and 1997, respectively. These policies have a cash surrender value
            of $583,000 and $556,000 as of December 31, 1998 and 1997,
            respectively.

NOTE 10. INCOME TAXES

            Deferred income taxes are provided for the temporary differences
            between the financial reporting basis and the tax basis of the
            Company's assets and liabilities. The major components of net
            deferred tax assets at December 31 are as follows:

<TABLE>
<CAPTION>
                                                                                        1998          1997
                                                                                        ----          ----
              Deferred Tax Liabilities:
<S>                                                                                <C>           <C>          
                       Property and Equipment                                      $ (473,000)   $   (226,000)
                       Unrealized gains on securities available-for-sale              (75,000)        (19,000)
                       Purchase Accounting                                           (525,000)       (575,000)
                       Mortgage Servicing Rights                                     (342,000)       (128,000)
                       Other                                                          (89,000)        (74,000)
                                                                                   ----------    ------------
                                Total Deferred Tax Liabilities                     (1,504,000)     (1,022,000)
                                                                                   ----------    ------------

              Deferred Tax Assets:
                       Reserve for loan losses                                        706,000         451,000
                       Accrued liabilities                                            538,000         104,000
                       State net operating loss carryovers                             58,000               -
                                                                                   ----------    ------------
                                Total Deferred Tax Assets                           1,302,000         555,000
                                                                                   ----------    ------------

                                Net Deferred Tax Liabilities                       $ (202,000)   $   (467,000)
                                                                                   ==========    ============
</TABLE>


            The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                              1998                 1997             1996
                                                             ----                  ----             ----
                     Current tax expense:
<S>                                                     <C>                 <C>                 <C>         
                              Federal                   $     989,000       $      957,000      $   779,000 
                              State                           225,000              129,000           95,000
                                                        -------------       --------------      -----------
                                                                                                 
                                       Total Current        1,214,000            1,086,000          874,000
                                                        -------------       --------------      -----------
                                                                                                 
                     Deferred tax provision (credit):                                            
                              Federal                          28,000              (13,000)         (15,000)
                              State                           (53,000)              (6,000)         (11,000)
                                                        --------------      --------------      -----------
                                                                                                 
                                       Total Deferred         (25,000)             (19,000)         (26,000)
                                                        --------------      --------------      -----------
                                                                                                 
                                       Total provision  
                                          for income     
                                          taxes         $   1,189,000       $    1,067,000      $   848,000
                                                        =============       ==============      ===========
                   
</TABLE>
                                                               

         A summary of the source of differences between income taxes at the
         federal statutory rate and the provision for income taxes for the years
         ended December 31 follows:


<TABLE>
<CAPTION>
                                                                       1998               1997                 1996   
                                                                       ----               ----                 ----
<S>                                                                <C>                <C>                  <C>       
                     Tax expense at statutory rate                 $ 1,088,000        $ 1,028,000          $  876,000
                     Increase (decrease) in taxes resulting from:                   
                              Tax exempt interest                      (89,000)           (59,000)            (75,000)
                              State income taxes, net of federal       114,000             76,000              56,000
                               tax benefit                                          
                              Amortized of goodwill and                             
                              other intangibles                        122,000             62,000     
                              Other                                    (46,000)           (40,000)             (9,000)
                                                                   -----------        -----------          ----------
                     Provision for income taxes                    $ 1,189,000        $ 1,067,000          $  848,000
                                                                   ===========        ===========          ==========
</TABLE>





                                       17
<PAGE>   44
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

            The Company is a party to financial instruments with
            off-balance-sheet risk, acquired in the normal course of business to
            meet the financing needs of its customers. These financial
            instruments include various commitments to extend credit and standby
            letters of credit. These instruments involve, to a varying degree,
            elements of credit risk in excess of the amount recognized in the
            balance sheet. The contract amounts of these instruments reflect the
            extent of involvement Company has in particular classes of financial
            instruments.

            The Company's exposure to credit loss in the event of nonperformance
            by the other party to the financial instrument for commitments to
            extend credit and standby letters of credit is represented by the
            contractual amount of those instruments. The Company uses the same
            credit policies in making commitments as it does for
            on-balance-sheet instruments.

            Standby letters of credit are conditional commitments issued by the
            Company to guarantee the performance of a customer to a third party.
            The credit risk involved in issuing letters of credit is essentially
            the same as that involved in extending loans to customers. The
            Company holds collateral supporting those commitments for which
            collateral is deemed necessary. Because these instruments have fixed
            maturity dates and because many of them expire without being drawn
            upon, they do not generally present any significant liquidity risk
            to the Company.

            The Company frequently enters into loan sale commitments prior to
            closing loans in order to limit interest rate risk for the period of
            time between when a loan is committed and when it is sold. These
            sale commitments are typically made on a loan by loan basis.

            A summary of the amount of Company's exposure to credit loss for
            loan commitments (unfunded loans and unused lines of credit) and
            standby letters of credit outstanding at December 31, 1998 and 1997
            was as follows:

<TABLE>
<CAPTION>
                                                           1998               1997
                                                           ----               ----
<S>                                                   <C>               <C>           
                    Loan Commitments                  $  40,213,000     $   20,883,000

                    Standby Letters of Credit         $     161,000     $      583,000

                    Commitments to Sell               $   6,675,000     $    1,459,000
</TABLE>


            Commitments to extend credit are agreements to lend to a customer as
            long as there is no violation of any condition established in the
            contract. Commitments generally have fixed expiration dates or other
            termination clauses and may require payment of a fee. Since the
            commitments may expire without being drawn upon, the total
            commitment amounts do not necessarily represent future cash
            requirements. The Company evaluates each customer's credit
            worthiness on a case-by-case basis. The amount of collateral
            obtained, if deemed necessary by Company upon extension of credit,
            is based on management's credit evaluation. Collateral varies but
            may include accounts receivable, inventory, property, plant and
            equipment, income-producing commercial properties and real estate.

NOTE 13. LEASE COMMITMENTS

            The Bank leases two branch office locations in Beloit, Wisconsin
            under leases expiring November 2014 and July 2012. The leases can be
            terminated every five years, but the Bank could be liable for
            remodeling or removal costs to the leased office spaces if the
            leases are terminated before the 14th year of the agreements.

            The Bank also leases an office in Roscoe, Illinois under a lease
            expiring in December 2002. The lease is subject to inflationary
            adjustments after three years from occupancy. In addition, the Bank
            is obligated to pay a portion of the real estate taxes, insurance,
            and common area maintenance.

            The total minimum rental commitment under the leases at December 31,
            1998 is as follows:

<TABLE>
<S>                                                <C>
                    Year Ending December 31:
                    1999                           $     95,000
                    2000                                108,000
                    2001                                108,000
                    2002                                108,000
                    2003 and later                    1,023,000
                                                        ------------
                                                        $  1,442,000
                                                        ============
</TABLE>



            Total rent expense for the years ended December 31, 1998, 1997 and
            1996 was $92,000, $49,000, and $36,000, respectively.

NOTE 14. EARNINGS PER SHARE

            Basic earnings per share are arrived at by dividing net income
            available to common shareholders by the weighted-average number of
            common shares outstanding and do not include the impact of any
            potentially dilutive common stock equivalents. The diluted earnings
            per share calculation is arrived at by dividing net income by the
            weighted-average number of shares outstanding, adjusted for the
            dilutive effect of outstanding stock options, and any other common
            stock equivalents. The following table shows the computation of the
            basic and diluted earnings per share:


                                       18
<PAGE>   45
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 14. EARNINGS PER SHARE (CONTINUED)

<TABLE>
<CAPTION>

                                                                   Income                Share           Per Share
                                                                 (Numerator)          (Denominator)        Amount
<S>                                                           <C>                   <C>                <C>          
                  For the Year Ended December 31, 1998                                                  
                  Basic Earnings Per Share:                   $        2,010,000    $      2,296,636   $        0.88
                                                              ==================             120,283   =============
                  Effect of Dilutive Stock Options                                  ----------------                 
                  Diluted Earnings Per Share:                 $        2,010,000    $      2,416,919   $        0.83 
                                                              ==================    ================   ============= 
                                                                                    
                  For the Year Ended December 31, 1997
                  Basic Earnings Per Share:                   $        1,956,000    $      2,283,428   $        0.86
                                                              ==================             101,160   =============
                                                                                    ----------------
                  Effect of Dilutive Stock Options                                    
                  Diluted Earnings Per Share:                 $        1,956,000    $      2,384,588   $        0.82
                                                              ==================    ================   ============= 

                  For the Year Ended December 31, 1996
                  Basic Earnings Per Share                    $        1,728,000    $      2,279,494   $        0.76
                                                              ==================              92,973   =============
                                                                                    ---------------- 
                  Effect of Dilutive Stock Options                                    
                  Diluted Earnings Per  Share                 $        1,728,000    $      2,372,467   $        0.73
                                                              ==================    ================   =============
</TABLE>



NOTE 15. COMMON STOCK SPLIT

           On June 15, 1996, the Company issued the 759,301 additional shares,
           at $.01 per share par value, necessary to effect a 3 for 2 common
           stock split.

NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS

           FASB Statement No. 107, "Disclosures about Fair Value of Financial
           Instruments", requires disclosure of fair value information about
           financial instruments, whether or not recognized in the balance
           sheet, for which it is practicable to estimate that value. In cases
           where quoted market prices are not available, fair values are based
           on estimates using present value or other valuation techniques. Those
           techniques are significantly affected by the assumptions used,
           including the discount rate and estimates of future cash flows. In
           that regard, the derived fair value estimates cannot be substantiated
           by comparison to independent markets and, in many cases, could not be
           realized in immediate settlement of the instrument. Statement 107
           excludes certain financial instruments and all nonfinancial
           instruments from its disclosure requirements. These fair value
           disclosures are not intended to represent the market value of the
           Company.

           The following methods and assumptions were used to estimate the fair
           value of each class of financial instruments for which it is
           practicable to estimate that value:

           Cash, cash equivalents and federal funds sold: For these short-term
           instruments, the carrying amount is a reasonable estimate of fair
           value.

           Securities: For securities, fair value equals quoted market price,
           where available. If a quoted market price is not available, fair
           value is estimated using quoted market prices for similar securities.

           Loans receivable: The fair value of loans is estimated by discounting
           the future cash flows using the current rates at which similar loans
           would be made to borrowers with similar credit ratings for the same
           remaining maturities.

           Deposits: The fair value of demand deposits and savings accounts is
           the amount payable at the reporting date. The fair value of
           fixed-maturity certificates of deposit is estimated using the rates
           currently offered for deposits of similar remaining maturities.




NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

           Short-term and long-term borrowings: The carrying amounts of
           variable-rate borrowings and notes payable approximate their fair
           values. The fair value of fixed rate borrowings is estimated using
           rates currently available for debt with similar terms and remaining
           maturities.

           Off-balance sheet financial instruments: The fair value of
           off-balance sheet instruments was estimated based on the amount the
           Company would pay to terminate the contracts or agreements, using
           current rates and, when appropriate, the current creditworthiness of
           the customer.

           The estimated fair values of the Company's financial instruments are
           as follows:


                                       19


<PAGE>   46



                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                  (CONTINUED)


NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)


<TABLE>
<CAPTION>

                                                                  December 31, 1998                    December 31, 1997
                                                                  -----------------                    -----------------
                                                            Carrying                             Carrying
                                                             Amount          Fair Value           Amount          Fair Value
                                                                 (in thousands)                       (in thousands)
<S>                                                          <C>                <C>                 <C>               <C>  
       Financial Assets
              Cash and cash equivalents                      15,973             15,973              8,680             8,680
              Federal funds sold and other                            
                 short-term investments                      15,335             15,335              8,889             8,889
              Securities                                     60,371             60,563             38,407            38,586
              Loans, net of allowance for
                       loan losses                          180,389            183,500            135,750           136,219

      Financial Liabilities and Other 
         off-balance sheet instruments:
              Demand deposit and savings                    112,157            112,157             71,402            71,402
              Time deposits                                 129,238            133,194             87,648            87,923
              Borrowings                                     21,699             21,396             17,081            17,114
         Loan Commitments                                         -                  -                  -                 -
         Standby Letters of Credit                                -                  -                  -                 6
</TABLE>



NOTE 17. REGULATORY MATTERS


           The Company and the Bank are subject to various regulatory capital
           requirements administered by the federal banking agencies. Failure to
           meet minimum capital requirements can initiate certain mandatory and
           possibly additional discretionary actions by regulators that, if
           undertaken, could have a direct material effect on the Company and
           the Bank's financial statements. Under capital adequacy guidelines
           and regulatory framework for prompt corrective action, the Company
           and the Bank must meet specific capital guidelines that involve
           quantitative measures of the assets, liabilities, and certain
           off-balance sheet items as calculated under regulatory accounting
           practices. The capital amounts and classification are also subject to
           qualitative judgements by the regulators about components, risk
           weightings, and other factors.

           Quantitative measures established by regulation to ensure capital
           adequacy require the Company and the Bank to maintain minimum amounts
           and ratios (set forth in the table below) of total capital and Tier I
           capital (as defined in the regulations) to risk-weighted assets (as
           defined), and the Tier I capital (as defined) to average assets (as
           defined). Management believes, as of December 31, 1998, that the
           Company and the Bank meet all capital adequacy requirements to which
           it is subject.

           As of December 31, 1998, the most recent notification from the FDIC
           categorized the Bank as well capitalized under the regulatory
           framework for prompt corrective action. To be categorized as well
           capitalized, the Company and the Bank must maintain minimum total
           risk-based, Tier I risk-based, and Tier I leverage ratios as set
           forth in the table. There are no conditions or events since that
           notification that management believe have changed the Company and the
           Bank's category.

           The actual capital amounts and ratios as of December 31, 1998 are
           also presented in the table (in thousand's).



                                       20

<PAGE>   47
                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                   (CONTINUED)




NOTE 17  REGULATORY MATTERS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                To be Well Capitalized       
                                                                                                    Under prompt
                                                                             For Capital            Corrective
                                             Actual                          Adequacy Purposes      Action Provisions
         As of December 31, 1998:            Amount        Ratio             Amount     Ratio       Amount      Ratio
                                             ------        -----             ------     -----       ------      -----
<S>                                          <C>           <C>               <C>         <C>         <C>         <C>  
         Company                             
                  Total Capital (To Risk     
                    Weighted Assets)         18,746         9.31%            16,111      8.0% 
                  Tier I Capital (To Risk                                                    
                    Weighted Assets)         16,830         8.36%             8,055      4.0%   
                  Tier I Capital (To         
                    Average Assets)          16,830         6.00%             8,744      3.0%
         Bank                                
                  Total Capital (To Risk     
                    Weighted Assets)         25,704        12.79%            16,075      8.0%        20,093      10.0%
                  Tier I Capital (To Risk                                                                             
                    Weighted Assets)         23,788        11.84%             8,037      4.0%        12,056       6.0%  
                  Tier I Capital (To         
                    Average Assets)          23,788         8.50%            11,488      4.0%        14,360       5.0%
         As of December 31, 1997:            
         Company                             
                  Total Capital (To Risk    
                    Weighted Assets)        $22,895        18.67%            $9,811      8.0% 
                  Tier I Capital (To Risk                                                    
                    Weighted Assets)         21,373        17.43%             4,905      4.0%    
                  Tier I Capital (To         
                    Average Assets)          21,373        11.79%             5,439      3.0%
         Blackhawk - Beloit                  
                  Total Capital (To Risk     
                    Weighted Assets)         19,253        18.22%             8,456      8.0%        10,570      10.0% 
                  Tier I Capital (To Risk                                                                              
                    Weighted Assets)         18,092        17.12%             4,228      4.0%         6,342       6.0%   
                  Tier I Capital (To          
                    Average Assets)          18,092        12.43%             5,822      4.0%         7,277       5.0%
         Blackhawk - Rochelle                
                  Total Capital (To Risk      
                    Weighted Assets)          2,932         8.48%             2,765      8.0%         3,456      10.0%
                  Tier I Capital (To Risk                                                                             
                    Weighted Assets)          2,621         7.58%             1,382      4.0%         1,728       6.0% 
                  Tier I Capital (To          
                    Average Assets)           2,621         5.29%             1,982      4.0%         2,479       5.0%
                                             
</TABLE>
                                         


NOTE 18. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

         CONDENSED PARENT COMPANY BALANCE SHEETS:

<TABLE>
<CAPTION>
                                                                             1998                 1997
                                                                             ----                 ----
<S>                                                                    <C>                  <C>            
              ASSETS
                       Cash and cash equivalents                       $        791,000     $       136,000
                       Investment in subsidiaries                            31,212,000          22,411,000
                       Investment securities available-for-sale                 189,000                   -
                       Investment securities held-to-maturity                         -             110,000
                       Due from subsidiaries, net                               105,000             697,000
                       Other assets                                             156,000              89,000
                                                                       ----------------     ---------------

                                Total Assets                           $     32,453,000     $    23,443,000
                                                                       ================     ===============
</TABLE>




                                       21


<PAGE>   48


                    BLACKHAWK BANCORP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                   (CONTINUED)


NOTE 18. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)

<TABLE>
<S>                                                                          <C>                     <C>             
              LIABILITIES AND SHAREHOLDERS' EQUITY
                       Liabilities:
                                Other borrowings                             $        7,673,000      $              -
                                Other liabilities                                       380,000               308,000
                                                                             ------------------      ----------------
                                                  Total Liabilities                   8,053,000               308,000
                                                                             ------------------      ----------------
                       Shareholders' Equity:
                                Preferred Stock                                               -                     -
                                Common Stock                                             23,000                23,000
                                Additional paid in capital                            7,229,000             7,133,000
                                Retained earnings                                    16,975,000            16,045,000
                                Less treasury stock, at cost                           (120,000)             (104,000)
                                Accumulated other comprehensive income                  293,000                38,000
                                                                             ------------------      ----------------
                                         Total Shareholders' Equity                  24,400,000            23,135,000
                                                                             ------------------      ----------------
                                         Total liabilities and shareholders'
                                               equity                        $       32,453,000      $     23,443,000
                                                                             ==================      ================
              
</TABLE>

<TABLE>
<CAPTION>
                  CONDENSED PARENT COMPANY STATEMENTS OF INCOME:
                                                                                1998                1997                1996
                                                                           ------------        ------------        ------------ 
<S>                                                                        <C>                 <C>                 <C>         
          Income:
               Dividends from subsidiaries                                 $  1,800,000        $  1,750,000        $  1,436,000
               Interest income                                                   20,000              74,000             171,000   
                                                                           ------------        ------------        ------------   
                       Total Income                                           1,820,000           1,824,000           1,607,000
                                                                           ------------        ------------        ------------   
          Expenses:
               Interest Expense                                                 169,000                --                  --
               Professional fees                                                 46,000              27,000              33,000
               Other                                                             44,000              45,000              31,000
                                                                           ------------        ------------        ------------   
                       Total Expenses                                           259,000              72,000              64,000
                                                                           ------------        ------------        ------------   
               Income before income tax benefits and equity in
               undistributed net income of subsidiaries                       1,561,000           1,752,000           1,543,000
               Income tax expense (benefits)                                    (73,000)               --                10,000
                                                                           ------------        ------------        ------------   
               Income before equity in undistributed net income of
                    Subsidiaries                                              1,634,000           1,752,000           1,533,000
               Equity in undistributed net income of subsidiaries               376,000             203,000             195,000
                                                                           ------------        ------------        ------------   
                       Net Income                                          $  2,010,000        $  1,956,000        $  1,728,000
                                                                           ============        ============        ============   
<CAPTION>
CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS:
                                                                               1998                 1997             1996
                                                                           ------------        ------------        ------------
<S>                                                                        <C>                 <C>                 <C>         
      Cash Flows From Operating Activities
               Net income                                                  $  2,010,000        $  1,956,000        $  1,728,000
               Adjustments to reconcile net income to net cash provided
                    by operating activities:
               Compensatory employee stock options recognized                    (1,000)             36,000              43,000
               Amortization of intangible assets                                 28,000              13,000                --
               Equity in undistributed net income of subsidiaries              (376,000)           (203,000)           (195,000)
               (Increase) decrease in due from subsidiaries                     650,000              44,000            (170,000)
               Accretion of discounts on investment securities, net                --               (35,000)            (46,000)
               (Increase) decrease in other assets                             (745,000)             39,000              (1,000)
               Increase in other liabilities                                     25,000              31,000              63,000
                                                                           ------------        ------------        ------------   
               Net cash provided by operating activities                      1,591,000           1,881,000           1,422,000
                                                                
                            ------------------------
           ------------        ------------        ------------   


     Cash Flows From Investing Activities
          Purchase of securities                                                     --          (4,967,000)         (5,334,000)
          Proceeds from maturity of securities                                  110,000           7,090,000           5,309,000
          Payments for investments in subsidiary                            (12,636,000)               --            (4,233,000)
          Repayment of investments in subsidiaries                            4,915,000                --                  --
                                                                           ------------        ------------        ------------   
              Net cash used in investing activities                          (7,611,000)         (2,111,000)            (25,000)
     Cash Flows From Financing Activities
          Proceeds from long-term debt                                        7,800,000                --                  --
          Repayment of long-term debt                                          (127,000)               --                  --
          Dividends paid                                                       (983,000)           (866,000)         (1,080,000)
          Proceeds from sale of common stock                                     98,000              42,000              14,000
          Purchase of common stock for treasury                                 (16,000)            (20,000)            (84,000)
                                                                           ------------        ------------        ------------   
              Net cash provided by (used in) financing activities             6,675,000            (961,000)           (936,000)
                                                                           ------------        ------------        ------------   
          Increase (decrease) in cash and cash equivalents                      655,000          (1,190,000)            461,000
     Cash and Cash Equivalents:
              Beginning                                                         136,000           1,326,000             865,000
                                                                           ------------        ------------        ------------   
              Ending                                                       $    791,000        $    136,000        $  1,326,000
                                                                           ============        ============        ============   

</TABLE>

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